Addison Wiggin on the Permanent Portfolio

Addison Wiggin has written a piece on Harry Browne’s permanent portfolio concept.  This piece was also published at  Since I promote the permanent portfolio as number one in my investment advice, I figured I would comment on this.

First, I think Wiggin has done a fair assessment of the permanent portfolio.  He points out that there is not a lot of volatility, with very few years where there are negative returns.  With this, the portfolio still gives an overall good return, particularly considering that you don’t have to go through the major up and down swings.

Wiggin also does a nice job of describing the mutual fund PRPFX, which is based on the concept.  As he notes in his article, the mutual fund deviates from the permanent portfolio.  It is a little more complex and perhaps a little more aggressive.  While this can mean bigger returns, it can also mean more volatility.

At the end of his piece, Wiggin asks the reader for his opinion.  He is wondering if there is another allocation that could possibly work better for the next 10, 20, or 30 years.  Here are a few responses, most of which I don’t really care for.

I am in the Richard Maybury camp on this one.  The permanent portfolio is not perfect and it actually somewhat scares me.  With that said, it is the best and safest portfolio that I know of.

If we tweak the portfolio because of today’s environment, then we are speculating.  That should be saved for the speculation portion of your portfolio, which would be separate from your permanent portfolio.  The only time I would really consider changing it would be is if there is some drastic structural change.  For example, if the government ever stops issuing bonds or decides to go to a gold standard, then this would change things.  Of course, this is unlikely any time soon, but there are other possibilities of major structural changes that might alter the permanent portfolio.

Government bonds scare me, but I realize they still serve a purpose.  It helped the portfolio quite a bit in the downturn of 2008.  In addition, the Federal Reserve is the biggest buyer of bonds right now, so I wouldn’t fight it.  Of course, if the Fed keeps buying government debt, then gold will do exceptionally well.

I do like the suggestion of real estate, but I’m not sure how that would fit into the permanent portfolio.  I would just keep it as a separate investment right now.  It is more of a speculation in the sense that I think now is a good time to buy.  If you are in the right position to buy an investment property, now may be a good time, especially if you live in a good place.

My one suggestion of the permanent portfolio is that it could be tailored for risk tolerance.  If you want to be more aggressive, you could reduce the cash portion only.  If you are really aggressive, you could have 30% stocks, 30% gold, 30% long-term government bonds, and 10% cash.  I would always try to keep a minimum of 10% cash, just so that you have some cash to buy depressed investments after a recession.

It is hard to imagine getting more conservative with the permanent portfolio, but I suppose it could be done.  To be more conservative, I would reduce the holdings of bonds and stocks and hold more cash and slightly more gold.  For example, you could hold 15% bonds, 15% stocks, 30% gold, and 40% cash.  If you are going to increase your cash, you should add a smaller portion to gold, just to protect against the threat of inflation.

In conclusion, the permanent portfolio still works.  It outperforms many professionals.  You can do it yourself and pay little in the way of trading and management fees.  If it is too complicated, you can always just buy the mutual fund.  The permanent portfolio should really be called the sleep-at-night portfolio.

America May Still Offer the Best Hope

America has been in a relative decline lately, especially compared to places like China.  America is supposed to be capitalist.  China is supposed to be communist.  However, in some ways, at least economically speaking, China is more free than the U.S.  China actually has less in the way of bureaucratic regulations against businesses which are actually enforced.

There is still far more capital and wealth in the U.S., but much of that is because of the previous prosperity of the last couple of centuries.  China is starting out from being completely poor just a few decades ago.  There are other countries that have surpassed the U.S. economically, at least per capita.  Hong Kong and Singapore come to mind.

I still think the U.S. is the best or near the best when it comes to religious freedom and freedom of speech.  It is also relatively good when it comes to gun rights.  While Congress is trying its best to regulate the internet, its continued attempts will mostly fail.  The cat is already out of the bag.  Americans are not going to shut up and this is a good thing.

I still believe that America offers the best hope for liberty in the future.  I will use the term “America” in this case, instead of “the United States”.  The individualistic spirit of Americans has remained, even if it has faded somewhat over time.  Americans are also not ashamed to make money.  Entrepreneurs are mostly embraced, despite listening to some of the “Occupy Wall Street” crowd.

I don’t think it is a coincidence that Ron Paul has had great success in America.  I have heard Europeans and other foreigners say that they wish they had a Ron Paul where they live.  But they don’t really understand the problem.  I’m sure there is someone like Ron Paul in every country in the world.  It is just that there is not enough support for freedom in those places for their “Ron Paul” to get a footing.

You could take someone exactly like Ron Paul and put him in any European country, Asian country, or anywhere else.  Perhaps even Canada might qualify, although Canada is slightly closer to the American way of life.  The Ron Paul clone would probably fail in these other places.  Perhaps the foreign policy message might resonate with some, but his economic views would be laughed at by the large majority of people.  He would not get a hearing because of the socialistic tendencies of the people.

Obama (and Bush before him) may be a socialist.  Maybe he isn’t.  Maybe fascist is a better description for his economic views.  But these politicians have to moderate their rhetoric in most cases.  They can’t talk like Castro and expect to be elected.  If Obama had campaigned with speeches taken from Hugo Chavez, it is unlikely he would have won the presidency.  While some Americans buy into the class warfare, most Americans do believe in some forms of property rights.  It is as much a moral issue for them as it is an economic issue.

Hugo Chavez would never be elected in America.  Ron Paul would never be elected in Venezuela, at least at this point in history.  It is part of the culture.  I believe that America has the best chance of leading the world away from statism and towards liberty.  If some other country can prove me wrong, then that is fine with me.

Keynes Doesn’t Matter

When I read or listen about Keynesian economics, named after John Maynard Keynes, I oftentimes hear others say that our economics have been greatly influenced by Keynes.  It doesn’t matter whether the person is a Keynesian, an Austro-libertarian, or someone in between (Chicago school?).  It seems that most people believe that Keynes was a highly influential figure and a big reason for the establishment’s belief in government solutions to economic problems.

I don’t really buy it.  Keynes was used as an excuse by the establishment to promote their big government programs, big government spending, and debt.  If Keynes had never existed, then the elites who wanted to promote statist economics would have found another “economic expert” to say what they wanted said.

Keynes was actually not dumb.  But his “General Theory” book was mostly incoherent and that happens to be his main work that is used to justify massive government spending and deficits.  The ironic thing is that Keynesians (both today and then) are more Keynesian that Keynes was, if that makes sense.  The followers of Keynesian economics are bigger statists that Keynes ever was and Keynes basically acknowledged that.

Keynes wasn’t really influential.  He was made to seem influential by the establishment who wanted cover for their big government policies.  Keynes was their excuse.  They could have found someone else if they had to.

It is not like today’s libertarian movement with Ron Paul.  Ron Paul actually has influenced people a great deal.  He has been someone for people to rally behind, but he has also served as an educator to many.  I think we would still have a growing libertarian movement without Ron Paul, but it would be a much slower process.

The good news is that Keynesian economics is losing credibility.  Ron Paul is gaining credibility.  Things could completely reverse one day.  Politicians might one day be forced to actually cut back on government, if bankruptcy doesn’t do it first.  Public opinion counts and it is changing.  Regardless of what Keynes actually thought, his followers are becoming less relevant as time goes on.

Anything Could Arise As Money

Last Saturday, I wrote a post about how technology is capable of slowly making government programs irrelevant.  I used the example of the Post Office becoming irrelevant due to the advances in communication.  I doubt that the U.S. Post Office will be around in 20 years.

It makes me wonder if we could see technology come up with a different form of money.  If the Federal Reserve continues on its disastrous course of buying U.S. government debt, then price inflation will become a major factor in the lives of most Americans.  Actually, it already is a big factor, but it is not so well known.

Could technology provide us with different forms of money.  It could really happen anywhere in the world and it really already does.  When Zimbabwe went into hyperinflation, people started using other currencies, like the U.S. dollar, and gold on a more regular basis.

But it doesn’t have to be other fiat currencies and it doesn’t even necessarily have to be gold or silver.  I have heard of people using cell phone minutes in other countries as a form of money.  Almost anything could be used.  It could be oil.  It could be stocks.  It could be computer storage space.  It could be timeshare points.  It could be a new website that sells things based on its own point system, instead of using dollars.  It could be any combination of things.

Technology is so sophisticated now, that you could have a broad market of different things with constantly fluctuating exchange rates.  It could be like a big stock market with huge trading.  Just as an example, perhaps you could trade your hotel credits from a timeshare for a certain amount of oil.  You wouldn’t actually get delivery of the oil though.  Then you could trade the oil shares for a new watch.

There is always the problem of government regulation and taxation.  That is a problem with using gold as money now.  But the market can find ways around this.  If the U.S. dollar (or any other currency) becomes weak enough, it would not surprise me to see people trying to trade more with other things.  There might eventually be a few things that people start to obtain, not because they want it, but because it is marketable to others.  These few things would then take on the characteristics of a medium of exchange.

I really have no idea how this would work or what might be used.  That would be up to the billions of people in the marketplace.  But it is possible that technology could help us find relief from the destructive policies of central bankers and governments.

Do You Own Your Share of the Gold?

This is hard to believe, but if you take all of the gold on the planet that has ever been mined and you distribute it evenly to every person on earth, then each person would have a little less than an ounce of gold.  It is impossible to know exactly how much gold exists (above ground), but the estimates put it at less than 7 billion ounces.  It would fill less than 3 Olympic-sized swimming pools.

If you own just one ounce of gold, then you are richer than the average person on earth, at least in measured with gold.  Of course, the only reason we correlate gold with wealth so much is because of its history as money.  We could talk about the number of cars people own, but most people don’t need several cars and wouldn’t buy extra cars as a store of value or medium of exchange.

If gold truly acted like money around the planet, then its value would likely be higher.  Gold is rare, as just discussed, which means that a small increase in demand on the margin could drive the price higher, in terms of dollars.

We should also remember that many governments/ central banks own gold.  This accounts for hundreds of millions of ounces, which means there is even less for individuals to own.

You can’t eat gold.  You can’t use it by itself to produce other things, aside from jewelry.  But gold has great characteristics for being used as a form of money.  So while gold itself does not really translate into wealth, it is a good medium of exchange and store of value.  So as long as the marketplace thinks it is a good form of money, it is a decent way to store wealth, even though it is really more like a receipt for wealth.

While society would be better off if the free market were able to choose the form of money we use (instead of governments), we should not forget that gold does not make a society rich unless it can be traded for real wealth.  Real wealth are the cars, houses, clothes, appliances, furniture, machinery, etc.  It also includes services and technology.  But if we want more of that real wealth, we will get more with a free market in money, instead of having a fiat currency imposed by governments, which serves to misallocate resources and slow the production of real wealth.

Technology and Government Programs

Jay Leno told the following joke on the Tonight Show (paraphrasing):  Encyclopedia Britannica is no longer going to be publishing a print edition.  I read that on Wikipedia.

A lot of times, we find humor in things that are true.  In the above joke, it is a business that has failed to keep up with technology that is going to be replaced.  But I often like to examine the effects that technology has on government.  It is said by some that no new government program ever dies.  But I think technology is changing that.

The Post Office is a good example.  It is one of the few government programs that is permitted by the Constitution.  But this doesn’t mean that government is efficient at running a mail service anymore than it is good at running anything else.  The Post Office is running massive losses each year.  They have a government-granted monopoly on first-class mail.  When I say that the Post Office has competition, most people automatically think Federal Express or UPS.

But it is really technology that is the biggest competition for the Post Office.  Its monopoly is not doing it much good.  It can’t even raise prices substantially without incurring more losses.  People are using email, Skype, text messaging, Twitter, Facebook, cell phones, Facetime, and other ways to communicate.  It doesn’t have to be through cards and letters.  This will also take down the phone services that gain monopolies in local areas to provide landline services.  They face too much competition from cell phones and other technologies.

The Post Office is also facing competition from websites like Amazon.  If you want to mail a birthday gift to someone, instead of buying it and sending it through the mail, you can buy it on Amazon and have it shipped through Amazon.  Amazon can even gift wrap it for you.  It will probably get to a point where Amazon has its own delivery service because so many packages are being sent.  It would not surprise me to start seeing Amazon planes and delivery trucks.

While the Post Office is still taking our tax money, it is quickly becoming irrelevant.  There will come a day when it comes apart completely.  It is a slow dying government program.

My hope is that we start to see more technological breakthroughs in healthcare.  It is difficult because of all of the government regulations in healthcare.  But if technology can increase in healthcare at just 10% of the speed as it is increasing in the computer industry, then we will see great progress.  We may get to a point where all of this healthcare regulation is virtually meaningless.  If you can just take a vitamin to cure yourself of diseases or if you can just step into a machine for a minute to relieve pain without side effects, then eventually health insurance will become meaningless.  You won’t need insurance if everything is cheap and available.

Technology is increasing in the computer and communication industries faster than most realize.  Processing speed is getting faster exponentially.  Chip sizes are getting smaller and storage space is becoming exponentially cheaper.  Where 3 or 4 percent growth in an economy is considered decent, the computer industry is growing at probably 50% per year, with compounding growth.

It is impossible to know what this world will look like in 20 years.  It is a race between big government and technology.  While big government will make life hard in the short term, I think technology will eventually win the race.  Government will slowly become irrelevant and most of it will die off.

Panarchy is the Way to Win Hearts and Minds

If someone asks me my political persuasion, I generally say I am libertarian.  Of course, being a libertarian can mean different things to different people.  Being libertarian means that you are pro-liberty.  For some, this means being a minarchist, which means they want limited government that protects against force and fraud and enforces contracts.  There are anarchists too, who believe in no government.  There are also people who call themselves libertarians, but who go way beyond the minarchist in terms of wanting government.  They may want smaller government, but that is not saying much in today’s world.

If we lived in a society that the minarchists want, we would be exponentially better off.  We would have a free market, with the government involved in only a few things like the court system, policing, and military defense.  The closer we can get to that point, the better off we are.

Anarchists, or anarcho-capitalists so as not to confuse them, believe in a society of liberty, with the complete absence of government.  While I think this is a good ideal, I think it is hard to sell people on.  Most people want government, even if it isn’t often good for them.

This is where panarchy comes in.  Michael Rozeff has written extensively on the subject.  It basically means that you should be free to choose your own government, regardless of where you live.  This should be clear in America.  There are red people (Republicans), blue people (Democrats), and others.  We all live with each other.  We interact with each other and do business together.  We may even live together in the same house.  Yet there is this major disagreement hanging over everyone’s heads.

We should be free to choose our own government.  I would take it a step further and say that people should be free to choose no government at all, so long as they are not infringing upon anyone else.

I am not sure how many anarcho-capitalists would agree with this.  I like the principled stand that anarchists take.  Most use a strong moral argument.  They use the non-aggression axiom.  They do not believe in the initiation of force for political or social purposes (I stole most of that from the LP pledge).

There is an interesting interview/ conversation between Peter Schiff and Stefan Molyneux.  It is funny because Schiff, as he says at the beginning, is forced to take the position of defending government.  While both of these guys are really bright, I found them not being on the same page a few times during their discussion.  Schiff was talking about the government not outlawing private security firms, but he seemed to miss the point that people are forced to pay for the government “security”.

Schiff says he wouldn’t put people in jail for not paying taxes (as what happened to his father).  But how could this be a tax then?  If you aren’t going to threaten to put people in jail, then it would have to be a voluntary donation.  You can fine a person for not paying taxes, you can order them to court, or do a number of other things, but if you aren’t willing to go and arrest the person, then all of the those actions are meaningless.  It is only the threat of force that makes something a tax.

In the discussion, I like when Molyneux said that if you want to get rid of slavery, you don’t argue for less slavery.  You argue for no slavery at all.  You win the argument by presenting the moral case.

I have seen different people convinced of liberty in different ways.  But I believe we need to use the moral argument often.  Libertarians hold the moral high ground.  It is those people who promote war and government welfare who want to use violence.  We must point out that virtually every government action involves the use of force or the threat of force.

As I have said before, I would have nothing against Obamacare if it didn’t force others to participate.  If a bunch of Obama supporters want to get together and have their own socialized healthcare plan, that is fine with me, as long as you don’t use the threat of violence against others who don’t want to participate. The same goes for all other government programs.  You can have your own government, or whatever you want to call it, so long as you are not forcing others to join you.

If someone is advocating a particular government program, you don’t even have to debate them on the merits of it.  You can simply ask if they will permit you to disagree without using violence against you.  If they agree, then point out that you should not be forced to participate then.  If that is the case, then the law they are advocating should only be voluntary.  You, or anyone else, should not be forced to participate in it or pay for it.

Use the moral argument.  It will frustrate people, but if something clicks inside their head, they will view things a different way.

Speculation Opportunity

I am an advocate of setting up a permanent portfolio, as described in Harry Browne’s book Fail Safe Investing.  However, I understand that some people want to speculate.  While this should make up a minority of your portfolio, I want to offer a couple of suggestions for speculation right now.

With the Dow above 13,000 again, it is likely that we are in the midst of a Fed-induced mini-boom.  While much of the growth is illusory due to the Fed’s loose monetary policy and artificially low interest rates, it would not surprise me to see stocks continue to do well.  However, if this is the case, then I would expect price inflation to kick in more.  The scenario that would surprise me the most would be a continuation of higher stock prices with lower price inflation and lower gold prices.

Gold has been somewhat volatile, but it has been in a relatively narrow range for the last couple of months. Oil has been volatile and seems to keep going higher, with periodic backtracking in the price.

However, gold and oil stocks have been awful in comparison to gold and oil itself.  For some reason, gold and oil/ energy stocks have really suffered.  If you invested in them this time last year, you are probably down.

If the stock market keeps going up, I would expect that gold and oil stocks will catch fire at some point, especially if the commodity prices are rising.  It is a good time to buy low.

There is, of course, a chance that things could turn quickly and the stock market could go tumbling down.  While I think it is less likely in the near future at this point, it might be good to hedge your bets a little.  For every 2 to 3 dollars that you invest in gold and oil stocks, you can put one dollar into an ETF that bets against the stock market.  If you go into a double inverse fund like DXD or SDS, then you will want to invest only one dollar for every 4 to 6 dollars in oil and gold stocks.

There are two mutual funds through Fidelity that you can use to invest in oil and gold stocks.  The gold stock mutual fund is FSAGX.  The oil/ energy stock mutual fund is FSESX.  Both of these funds are down quite significantly over the last year, which makes them a potential bargain right now.

Remember that these are speculation plays.  They are risky.  If you want to be conservative with your money, then put it all in the permanent portfolio setup.  While there is no guarantee with that either, it is the safest thing I know of at this time.

Obama on Oil Speculators

Obama has announced plans for stronger oversight of oil futures markets and is proposing an increase in funding for regulators.

So that has been the problem this whole time.  There hasn’t been enough government oversight of the financial markets.  Of course that must be the reason for high oil prices (please not sarcasm).

Obama has decided to continue being a demagogue.  If he isn’t a demagogue, then he is just plain stupid.  Perhaps he is both.

Obama said, “We can’t afford a situation where speculators artificially manipulate markets by buying up oil, creating the perception of a shortage and driving prices higher, only to flip the oil for a quick profit.”  He also said, “We can’t afford a situation where some speculators can reap millions, while millions of American families get the short end of the stick.”

What is his bigger bureaucracy of regulators going to do?  Are they going to prevent the futures market from working?

It is time for a good economic lesson here, something that Obama and his henchmen wouldn’t understand.  Speculators play a vital role in the marketplace.  They provide more accurate pricing and they actually smooth out bumps in pricing.

Let’s say that speculators think that there will be an increase in demand for oil in the near future.  Or perhaps they think there will be a war in Iran or some other event that will cause a shortage of oil.  Either way, let’s say that speculators think the price of oil will be going up in the near future.  In this case, the oil speculators will buy futures contracts that drive up the price of oil.

But the increase in the price of oil is a signal to the market.  It tells consumers to cut back on their usage. It also sends signals to suppliers.  If the suppliers think that prices will be much higher in the near future, then they may hold back on selling right now.  Or they may decide to extract oil from more expensive places.  With the higher price of oil, it may be worth it to extract more oil using more expensive procedures.

By raising the price of oil now, the speculators are doing others a favor.  They are signaling consumers to cut back now and they are signaling suppliers to increase their supplies for later.  If the speculators hadn’t been there to bid the prices up, then the oil prices would have been that much higher in the near future.  Instead, the speculators actually prevented a big spike in prices.  The process was more gradual and less severe because of the speculators.

If the speculators didn’t exist, then everyone would be guessing, almost constantly.  You could end up with a situation where the price all of a sudden doubles or triples in the matter of days.  The speculators make this less likely to happen.

Of course, some speculators could be wrong about their guess for the future.  But they will lose money if they bet the wrong way.  Those who guess correctly are the ones who are rewarded.  And they should be rewarded, because they are the ones sending correct signals to the market.  They are preventing less shortages in the future.  They are helping to properly allocate resources.

Obama does not understand free market economics.  If he does, he is a total liar.  Either way, he is demagoguing the situation.  Oil is going up for other reasons that he is partially responsible for.  Oil prices are higher than they would otherwise be because of threats to Iran, government regulation, and monetary inflation (which is encouraged by government debt).  If Obama wants to help lower oil prices, he should resign.  He should ask Bernanke to do the same.

Poor Americans Pay Taxes

The other day, I discussed loaning free money to the government via too much tax withholding.  I briefly mentioned the poor and said that while they don’t pay federal income taxes, they most certainly do pay taxes.

First, while I use the term “poor” for the purposes of this writing, a more accurate term would actually be “low income”.  The income tax does not tax wealth.  It taxes income.  But we can make an assumption that at least most people who are really poor, also have a low income.

I hear many so-called conservatives who like to point out that the poor do not pay taxes.  This is not correct, when stated like that.  Most poor people do not pay any regular income taxes, but they most certainly do pay taxes.

What really amuses me is when I hear supposed conservatives say that everyone should “contribute” something.  They want to raise taxes on the lower income people.  These people are statists.  If the income tax is unfair, it is only because it exists.  When Ron Paul is asked about only half of American taxpayers paying any income tax, his response is that we are halfway there.  He doesn’t want to raise taxes on anyone; he wants to cut them.

While most poor Americans do not pay any federal income taxes, they do pay many other taxes.  There are payroll taxes, which are paid by anyone working “on the books”.  There is also the employer portion, which is an indirect tax.  There are corporate taxes, which make shareholders poorer, prices higher for consumers (including the poor), and wages lower for workers (including the poor).  There are many different sales taxes and excise taxes and fees.  There are taxes on gasoline, on hotels, on cars, on phone bills, on water bills, on electric bills, etc.  There are car registration fees.  There are property taxes, which are paid indirectly by renters through higher prices.  The list could go on and on.

Most of these taxes actually fall disproportionately on the poor.  If there is a one dollar tax on something or if the price of a loaf of bread goes up a few cents because of a tax, then it hurts the poor person the most, who is already struggling to make it.

The worst “tax” of all is monetary inflation.  It creates business cycles, it redistributes wealth (usually from the poor and middle class to those with political connections), it discourages savings and investment, it changes people’s time horizon, and it is all done in a hidden way.  Most poor people don’t realize how much they are being screwed by inflation.  They don’t understand that prices are going up solely because of monetary inflation.

Again, when the price of milk goes up 25 cents, it is the poor person who is hurt the most.  Their income won’t rise because of inflation until later, if they are lucky.  They are already paying the higher prices by the time they see any rise in earnings.

Inflation is the worst tax of all.  It can ruin a society.  America had huge income tax rates in several decades of the early and mid 20th century.  The highest rate was over 90% at times.  And Americans were supposedly in a Cold War against communism?  90% or more sounds communist enough to me.

Yet, despite the high income tax rates, times were not always too bad.  Society can survive this.  The 1950’s were a relatively prosperous time, considering the high rates.  The key is that monetary inflation was relatively low.  In the 1970’s, income tax rates were a bit lower, although still high.  But because of the high monetary inflation, it was a tough time, economically speaking.

Today is a tough time because of massive government and massive money creation.  It is wreaking havoc on the economy.  Monetary inflation is hurting us every day.  We need to end the Fed by removing its monopoly on money.  That is one sure way to help the poor.