Our string of Guest Posts continues today with this excellent offering from Green Lantern.
"Not Even Harry Browne Thought It Was Going To Be This Bad"
by "Green Lantern"
Not Even Harry Browne Thought It was Going To Be this Bad!
With the sharp minds of Turdville giving daily coverage to just about every angle of economic and geopolitical news, I went searching the haystack for another indication to add to the list that all is not well. And that brings us to Harry Browne.
Who is Harry Browne? No, we are not talking about this wannabe Dirty Harry:
But this Harry Browne:
Harry Browne might be considered the father of what has blossomed into the thriving metals and alternative investment blogosphere. Long before King World News, ZeroHedge and yes even TFMetalsReport, there was a guy named Harry Browne. A bastion of wisdom and good sense, Browne was a libertarian, advocate of free-markets, financial advisor, and presidential candidate. Harry dedicated his life to writing on various personal, business and economic topics, teaching individuals how to thrive socially and in business under the rule of tyrannical government. He saw the dangers of a system which no longer was based on a gold standard before we even exited the gold standard. He was a good friend of Ron Paul and in 2006 when Harry Brown died, Ron Paul gave a tribute on Brown before the US House of Representatives https://www.lewrockwell.com/paul/paul313.html
Harry Browne was one of the first free market writers I was introduced to and you can still find his writings and talks on the Harry Browne website. Some of his most famous writings including "You Can Profit from a Monetary Crisis" and "Fail Safe investing", which was written in 1998. It offered investors a very simple asset allocation plan to protect their wealth under any market conditions. It even has it's own entry on Wikipedia and for many years many of the metal-friendly newsletter writers advocated it's use. Browne described four different economic conditions that prevail and the investments that would do well under those conditions.
Inflation- Solution: invest in Gold and Precious metals
Deflation-Solution : Bonds will out perform
Prosperity-Solution: Stocks work wonders
Recession-Solution: Dash into cash.
The idea was that, at any given time, the economy would reflect one of the above conditions. By investing 25% of your wealth in these asset classes, you would preserve your wealth, keep ahead of real inflation while the strong part of your portfolio would offset any losses to the weak part of your portfolio. It was geared for conservative investors who wanted to preserve their wealth for retirement. Investors could invest in the prescribed asset allocations directly or invest through a fund that he set up known as The Permanent Portfolio (PFPFX) founded in 1982. The Permanent Portfolio lived up to expectations and outperformed over four decades. It's 10-year performance as of 1/1/2013 was +10.20% annualized.
However, for the first time since it's inception, the managers of the fund have realized that we are dealing with a new market condition that Browne didn't account for in his writings: Government Psychopathy and the sci-fi thriller which is the global economy. In January, the fund made an historic announcement that they would deviate from Brown's full-proof formula specifically changing their strategy in their bond portfolio. For the first time in the portfolio's history it was not living up to it's original mission as a conservative, fool-proof, fail safe fund to guard against all economic conditions. Investors began voicing their concern related to the bond market being a dangerous gambit and evolving into a bubble of epic proportions although I believe the fund might be downplaying it by calling bonds "overvalued" in light of rising interest rates.
Recently Rick Rule made an observation on the behavior of the markets. "What we are seeing now is chaos in global markets." He continues, "These are very very strange times. It would appear that up days are synchronous. Everything goes up together. Down days are similarly synchronous. And as you have all have doubtlessly noticed, there are many more down synchronous days, than up synchronous days". In other words, Harry's keen observations, at least for the moment, ceased to be true. One of the factors Rule attributes this to is "Liquidity is not a substitute for solvency." We need to come to terms with the fact that "WE ARE IN UNCHARTERED TERRITORY". Hear it and feel it!
Let's take a quick look at the past performance of the PRPFX. First we see that it did amazingly well and performed consistently for forty plus years. PRPFX until 2011.
The fund was able to deliver positive results even in very bad markets. So even when stocks and bonds were under-performing, mom and dad still were able to pocket real inflation-adjusted returns.
Something began to change in 2012 as the fund began experiencing volatility well beyond the tolerance of the conservative investor.
It's unlikely that Browne or for that matter anybody in the alternative investment world back in the early 2000's, could have realized what we do know about the extent of the manipulation in the metals. Nor is it likely that Browne imagined the federal debt could exceed the size of the total economy nor the capability of Central Banks to counterfeit on such a large scale.
Could anybody have envisioned the scale of fraud in the market before LIBOR, rehypothecation and MF Global, the 2008 bailouts, the derivatives bubble or the number of interventions in currency markets including the Swiss pegging the Swiss Franc to the Euro? The Permanent Portfolio Fund has always regarded the Swiss Franc as the currency with a high safe haven status but the Swiss taught us that all fiat currencies are subject to manipulation.
Browne saw a world where long term bonds performed well in a deflationary period and gold outperformed in an inflationary period. Well, here we are well into QE3 as The Fed continues to fortify the monetary base, gold and silver has been volatile with excessive short term risk. No longer can they be confident that gold and bonds will behave in a predictable fashion. Good ole Harry must be turning over in his grave.
We also have a situation where the the liquidity in the system is not marinating the entire kabob equally and currencies enjoy unprecedented volatility. So all of a sudden we have artificially low returns in three asset classes and more volatility in stocks than the average person cares to endure. The Permanent Portfolio fund has been forced to acknowledge the dynamics of financial repression. Are the changes enough to preserve the wealth of the middle class conservative investor? I imagine the average investor in the PFPRX are hard working folks who scrimped and saved every penny and all of a sudden they find themselves on a rollercoaster ride of volatility that they never expected.
What can we take away from this recent portfolio re-evaluation. Chaos in the market is upon us. Bernanke simply hinting at removing QE was enough to begin to pop the bubbles that are in the stock and bond markets. He was able to do that on perception alone and it's likely in the next few weeks we will see continued capitulation across markets as he continues to pump liquid insanity into the system. See this as an opportunity. If you have the courage and the resources, take advantage of the opportunities that present themselves. Otherwise, sit tight.
Conservative, fail safe investment strategies, while having served their purpose, no longer guarantee security in highly manipulated, volatile markets. The more governments counterfeit and operate under a Keynesian paradigm, the more volatility we will see in the markets. As Kyle Bass recently pointed out, our government does not have the will to fix what is wrong. While the average person, doesn't likely ever buy bonds directly, millions of American's have them parked in their 401k and retirement plans and have no clue the great charade that the bond rating agencies have pulled to create one of the most extraordinary bubbles in history.