Charles Gave on the Permanent Portfolio
Plus, a Note on Ray Dalio’s Productivity Plan
“Some of the most undervalued assets on Wall Street are history books.” -Morgan Housel, author of The Psychology of Money
“The creation of debt should always be accompanied with the means of extinguishment.” -Alexander Hamilton
Hello, Readers & Subscribers:
In recent months, the financial, political, and sociocultural worlds have been colliding with one another in billiard fashion. This state of affairs will surely continue through Election Day and well after the subsequent Inauguration, regardless of which candidate takes office (or resumes it, in Harris’ case).
With matters so fraught and unpredictable, we’re turning to a pair of gentlemen whom the elder Haymaker regards as among the financial world’s most perceptive luminaries: his mentor, Charles Gave, and one of his favorite industry peers, Ray Dalio. (He’s also always pleased to showcase the work of financial experts who are even older than he is!) For Ray Dalio, we’ve excerpted a passage from a comprehensive article he recently wrote for Time (wow, now that one’s a blast from the past!).
For the former, we are re-publishing a piece from Charles’ namesake firm, Gavekal Research, in which he makes a case for, among other things, precious metal diversification. Naturally, Team Haymaker has a fondness for that portfolio positioning suggestion, notwithstanding our current profit-taking stance with regard to the gold miners. Charles’ recycling of Harry Browne’s 1970s-era “permanent portfolio” is particularly intriguing.
This is because one of Team Haymaker’s fundamental beliefs is that the 2020s are likely to turn out a lot like the Disco Decade. Accordingly, we suggest you carefully review the data backing up this largely neglected approach.
In aging societies such as those in the West, per Ray Dalio, enhancing productivity is absolutely essential to achieving healthy growth. Yet, the policies being proposed are not addressing that need. In reality, many of them are likely to turn out to be highly contrary to this exigency. Absent some type of productivity-boosting miracle (like a different kind of nuclear proliferation, as with Small Modular Reactors), Western central banks may be forced to use their Magical Money Machines to finance their governments.
Of course, there’s no free lunch and the cost for that policymaking shortcut is likely to be, once again, higher structural inflation. And that’s another reason to overweight hard assets, like precious metals… which precious few investors are doing these days. That’s an error of omission they are likely to seriously regret if either of these two brilliant gentlemen are on the mark.
The Haymaker Team
The passage below is excerpted from a piece written by Ray Dalio and published by Time, titled The Urgent Need for a Plan to Boost National Productivity. We encourage you to follow the provided link and read Mr. Dalio’s entire article at your leisure.
We hear a lot from both sides about what they are going to give us to bring us prosperity but not much about where the money and the productivity that is essential to pay for these things will come from. We do know that those of the left will get some large amount of money by taxing the rich and companies, but we don’t know how much it will be and whether it be in the form of wealth taxes as well as income taxes. We also know that those on the right will tax the rich and companies less and will be more inclined to tax imports and cut spending on entitlements. In either case, to me it looks like we have ahead of us an ominous mix of deficits, taxes, and benefit cuts, with neither party having a good plan for providing what we need most, which is broad-based productivity.
Permanent Portfolios, Policies And Asset Returns
Charles Gave
“Those who would give up essential liberty, to purchase a little temporary safety, deserve neither liberty nor safety.” Benjamin Franklin, 1755
“You were given the choice between war and dishonor. You chose dishonor, and you will have war.” Winston Churchill, 1938
“Policymakers who would sacrifice the currency for economic growth end up with neither.” Charles Gave, walking in the footsteps of giants, 2024
A couple of years ago, one of our faithful clients in Paris presented me with a copy of Harry Browne’s classic Fail-Safe Investing. At the age of 78, I had never read this simple, elegant treatise by the US Libertarian Party’s two-time presidential candidate. I was immediately captivated; so many of Browne’s ideas corresponded with my own work, originally developed in the mid-1970s, focused on investing through economic cycles using the Four Quadrants framework.
Investors should split their capital equally between cash, bonds, gold and equities
Browne’s theory was simple: investors should divide their assets equally between four buckets: cash, 10-year government bonds, gold and domestic equities. Then, beyond rebalancing at regular intervals (monthly, quarterly or annually), they should stop worrying about financial markets and get on with their lives. Since then, Didier Darcet and I have tested the performance of what Browne calls his “permanent portfolio” for developed economies where we could find sufficient data, including the US, UK, Japan, Germany, France, Switzerland, Australia, Canada and a handful of others. Everywhere the results were similar: permanent portfolios built around Browne’s allocations all grew by between 3% and 4% per year in real local currency terms, with very low volatility and an almost complete absence of double-digit drawdowns.