I believe we are in a new financial crisis. It may or may not be similar to 2008. As with most events in history, you will find similar characteristics with past events.

I have been a long-time proponent of having a permanent portfolio. This is designed to protect your wealth in any economic environment. There are no guarantees in life, but this is the closest thing I’ve found to protecting wealth in virtually any environment.

If there is an all-out nuclear war, then no investment strategy is going to do you any good unless you have a bunker and a lot of food. I am talking about the common economic environments of inflation, deflation, prosperity, and recession.

While a permanent portfolio is generally conservative, it doesn’t mean you can’t have risky investments. But these should be outside of your permanent portfolio. Your permanent portfolio is for the money you can’t afford to easily lose.

So the big question is: Will the permanent portfolio hold up with what is coming in 2023?

A Financial Crisis or a Monetary Crisis

One problem is that we don’t even know how this will play out. It looks like a financial crisis with banks failing, but we know that the Federal Reserve and other central banks have the capability of bailing out banks (or bailing out depositors) by creating new money out of thin air.

If the Fed chooses to continue bailing out depositors, then it might lose its grip on its supposed fight against inflation. In other words, if the Fed has to create new money to “solve” a banking crisis, it creates a new crisis.

It then becomes a monetary crisis where you start to worry more about the purchasing power of your dollars. Your dollars are safe in the bank in terms of their quantity, but their value quickly diminishes.

Will we see something resembling more of a depression with failing banks and depositors losing money (in excess of what is covered by the FDIC)? Or will we see massive price inflation or even something closer to hyperinflation?

The Point of the Permanent Portfolio

The whole point of the permanent portfolio is that we can’t predict the future with any certainty. It is designed to protect your wealth no matter what crazy decision a bunch of Fed officials make.

If the next bank failure comes and the Fed decides not to come to the rescue, maybe we will see a financial crisis greater than 2008. We may see a depression with price inflation coming down. In fact, even if there are bailouts, there still may be some kind of depression.

In late 2008, stocks fell hard. This could easily happen again. It could happen to an even greater degree.

Maybe the Fed’s bailout of Silicon Valley Bank is the new norm. Maybe all quantitative tightening is over and we will see price inflation go higher than it was last year. Stocks still may fall, or they may start an upward trajectory as happened in the spring of 2009.

We just don’t know. All four investments in the permanent portfolio – stocks, bonds, gold and cash – are at the whims of central bankers and the billions of people that make up the world economy. They could go in any direction. But there is a good chance that at least one of them will do well in the coming year or so.

What About Interest Rates?

Since the permanent portfolio is somewhat conservative, then why not just invest in Treasury bills that are paying close to 5%?

In some cases, this may make sense. If you are saving to buy a house in one year, then it probably makes sense to put your savings in a Treasury bill. But even here, we have to be a little bit careful.

The permanent portfolio is wonderfully designed, especially with its gold portion, to protect your wealth against inflation.

If you are saving for the longer run, then you want to get returns above inflation. In the short run, you really just need to concern yourself with hyperinflation, which hopefully never comes.

If you invest in shorter-term Treasury bills right now, you are still lagging behind inflation. Again, this may be a good strategy if you have a shorter-term purpose for the money.

But for the long run, you are going to lose purchasing power. Even with higher interest rates today, they are lagging behind price inflation. If price inflation goes to 10% from here, it is going to take a little while for interest rates to catch up.

Also, since the start of the banking issues becoming apparent, interest rates have gone down. This has been good for bond holders. But if you have all of your money in Treasury bills, the rates will be lower when it is time to roll them over.

So I generally don’t think Treasury bills are a good substitute for the permanent portfolio, even at this stage.

Buy Low, Sell High

One of the features of the permanent portfolio is that when you rebalance, you are selling assets that have risen in price, and you are buying assets that have fallen in price (or not gone up as much as the others).

Sometimes this can seem to hurt you in the short run because you miss out on the big runs in certain assets. But you will still have 25% exposure while taking the gains off the table. So you don’t have to think about when to buy and sell, as long as you stay disciplined and rebalance according to your own schedule.

(The mutual fund PRPFX, while not an exact replica, is a good substitute for setting up your own permanent portfolio. The great thing about PRPFX is that it takes away any temptation from you in terms of rebalancing or not rebalancing your portfolio.)

Personally, I tend to think stocks are the biggest risk category right now. I would actually prefer bonds at this point with the threat of a major recession coming (if it’s not already here).

However, in terms of the permanent portfolio, I don’t need to speculate. I can just follow the formula. I can speculate outside of the permanent portfolio by not owning stocks or even by shorting stocks.

Sleep at Night

Sometimes I call it the sleep-at-night portfolio. I don’t want to constantly be worried about my investments. I take interest in the financial markets because it is interesting to me, but I’m not panicked about a stock market crash, or Bitcoin falling, or interest rates spiking, or whatever.

I am well diversified, so I know that I am not going to have wild swings like some other people do.

Just because we are on the verge of another financial crisis, I am not worried about changing my general investment strategy. In other words, I can sleep at night, at least in terms of not worrying about my investment portfolio.