Issue #5, Volume #1
A Portfolio That Can’t Lose Money, No Matter What Happens
Three Things You Need To Know Now:
1. The Federal Reserve cut rates 50 basis points today, but don’t expect more rate cuts. Why not? Because gold is trying to tell us that inflation isn’t over. As the chart below shows, since the end of the COVID bubble in the bond market (around mid 2021), the price of gold has rallied strongly while real interest rates (not nominal rates!) have fallen. This is exactly how the price of gold should move in the face of a long period of high inflation. What’s surprising is, since the fall of 2022, after the Fed raised rates aggressively to contain inflation, real interest rates have been relatively strong, but gold has continued to rally. And now, with the Fed cutting rates, gold continues to rally. This suggests that a return to negative real interest rates (1-year Treasury notes yielding less than inflation) will soon happen.
2. Will the Fed cutting rates mark the beginning of the artificial-intelligence (“AI”) bubble? It’s very unusual to see the Fed cutting rates with the stock market (the S&P 500) at (or near) an all-time high. The only other time that’s ever happened was in July 1995. The late 1990s were, like today, a period of extremely “frothy” equity markets – the S&P 500 was up 217% from January 1995 to December 1999. A year after that rate cut, former Federal Reserve Chair Alan Greenspan made his famous “irrational exuberance” remarks, suggesting that stocks were significantly overvalued, while the major indexes put together three of the best years in market history. Perhaps more interestingly, the IPO of Netscape, which launched the internet age in the stock market, took place in August 1995, the month after that rate cut. So… perhaps these frothy markets and the Fed cutting rates at new highs are signs of the age of AI in the stock market.
3. Consumer credit looks like a bubble. We’ve been pointing out the many ways this economy looks very weak: rising unemployment, falling consumer demand, and soaring default rates on consumer credit. But we also should point out that, despite these worrying developments, there’s no question that the U.S. consumer continues to borrow, massively. Consumer credit rose by $25.5 billion (!) in July, the biggest one-month gain since November 2022, and the 11th straight monthly increase. In the past, declines in consumer credit have coincided with the beginning of a recession (1980, 1990, 2008). But declines in 2015 and then again in 2020 did not. Perhaps because government spending (and government deficits) now make up so much of our economy.
And also…
If you’ve been wondering how our economy can overcome soaring defaults – the hundreds of billions of dollars in commercial real estate, more than $500 billion in Treasury bond losses on the books of our largest banks, and soaring default rates on college loans, credit cards, and cars – look no further than the Federal Reserve’s own balance sheet. The Fed’s cumulative losses over the last two years? $188 billion, marking the first time in its history that the Fed is facing substantial deficits. The Fed has “papered over’ all of the losses in the banking system. As long as this goes on (and it will certainly continue), you should expect to see more inflation (which passes these losses onto anyone holding U.S. dollars). It’s this constant debasement that’s causing gold, Bitcoin, and high-quality businesses to soar in price. It’s a weird world where the worse our financial institutions perform, the richer our wealthiest people become. I’d say that’s a pretty big moral hazard. And I’d warn everyone that: 1) It won’t last for long, and 2) When it ends, there will be a terrific amount of violence, because the idea of wealth will have become completely delegitimized in our country. Everyone who owns assets will become a “bankster.”
The Permanent Portfolio: How to Make It Vastly Better
I am extremely lucky.
As a young man (I wasn’t even 25 yet!) I met Bill Bonner. At the time, Bill was “only” a renowned copywriter. He wasn’t yet the globetrotting billionaire publisher he was to become. By the mid-1990s, when I met him, he was only beginning to scale that empire. Over a 40-year span, starting in the early 1980s, Bill transformed a friend’s failed magazine into one of America’s most successful publishing firms, The Agora Companies.
Bill taught me everything I know about writing and about running a good business. He taught me far more than he realized, as I’ve studied his every move for almost 30 years. He’s been my most important partner, teacher, mentor, and friend.
A very important lesson he taught me was that you can’t ever tell other people what to do: you can only persuade them.
Another critical lesson: you can’t guarantee success, but you can deserve it.
Bill never had a hobby outside of his business. He worked long days, but I never once saw him frustrated, annoyed, or bored. He seemed to enjoy the many setbacks that occur in life and in business, and took each with a wry sense of humor: what have the gods thrown at us now?
I struggle to find that equanimity in my own life, but Bill set an incredible example.
In fact, if you ever met him, you’d agree he has a “presence.” Much like Clint Eastwood (whom he closely resembles), Bill isn’t arrogant or unfriendly. But he’s clearly not a man to be trifled with, either. I used to offer $100 to any male employee who would give him a hug at Agora’s Christmas party. Nobody ever took me up on it.
But… ironically… the most valuable thing Bill ever taught me was how not to invest!
Bill, quite simply, never understood why you’d invest in stocks. He didn’t believe it was reasonable to buy shares in a business where you didn’t know the other owners, where you didn’t know the employees, where you weren’t, at least in some way, directly connected to the affairs of the company.
He also couldn’t understand the valuations. When we acquired other publishing firms, we bought from people we knew well. We bought the publishers of products we’d enjoyed reading for years. And we paid only around 4x earnings for a full controlling interest!
Why, Bill would argue, would you ever buy a minority stake in a company, where you have no control at all, for 20x earnings? Ironically for the owner of a vast financial publishing empire, Bill had no interest in stocks, and as far as I know, he never bought a stock himself.
Thus, when I bought shares of Amazon (AMZN) in 1999, Bill figured I was going to lose all my money. He called the company “The River of No Returns” and predicted its bankruptcy.
Fortunately for me (and for you), Bill introduced me to one of the most important philosophers in American history, Harry Browne.
Harry Browne was an author, an investor, and, twice (in 1996 and 2000, for the Libertarian Party) a presidential candidate. He wrote an incredible book that had a profound impact on my life: How I Found Freedom in an Unfree World. But, far more germane to us, Harry also figured out how to build a perfect portfolio.
Harry’s “permanent portfolio” is a way of investing where you don’t have to trade, and you don’t have to follow the news or worry about the future – because, the way it’s designed, you can’t lose money, no matter what happens to the economy or to individual stocks. (See “Today’s Chart,” offering an example, below.)
You might think that’s impossible. But in fact, in the late 1980s, these brilliant ideas were copied by Ray Dalio, who put them into practice at the center of his investment firm, Bridgewater Associates. And, in part because of these ideas, Bridgewater has become the world’s largest hedge fund, managing more than $100 billion.
Harry Browne’s ideas were deceptively simple. He suggested a four-part portfolio: 25% in stocks, 25% in bonds, 25% in gold, and 25% in cash.
All Weather, Bridgewater’s name for its Permanent Portfolio, expanded slightly on these categories: 30% in stocks, 40% in bonds, 15% in intermediate duration fixed income (like mortgages), 7.5% in commodities, and 7.5% in gold.
The Permanent Portfolio has compounded at around 7% a year, with extremely low volatility. In fact, its largest drawdown (that is, peak-to-trough decline) since 1989 is only 12.5%. Dalio’s strategy produces similar returns, with slightly higher long-term compound results, of 7.5% a year, but it has more volatility. Its maximum drawdown was -18.5%.
What Harry Browne figured out was that in a global economy dominated by one government’s paper money there would be a never-ending cycle of inflation, punctuated by short periods of deflationary recessions. So, Harry surmised stocks would do well for the most part. But every now and then they’d crash, along with interest rates. And during those brief, deflationary periods, bonds would outperform. Likewise, Harry understood that cash would help moderate the volatility of both the stocks and the bonds, but that never-ending inflation meant that the underlying value of money would constantly decline. Therefore, holding gold would pay off over time.
In short, you own stocks. But you hedge them with bonds. And you own bonds and cash, but you hedge them with gold.
In my next few journals, I’ll explain how I learned the philosophy behind these ideas from Harry Browne. Then I’ll show you how I’ve been working to improve on them. And for subscribers to The Big Secret on Wall Street, I’ll unveil a new, complete portfolio based on these ideas.
The goal? Deliver a portfolio with 3x the performance of the Permanent Portfolio, but without any additional risk. I agree, that seems impossible.
So, as always, let me know how badly you expect me to fail: [email protected]
Good investing,
Porter Stansberry
Stevenson, MD
P.S. One more fun story about Bill. He is legendarily parsimonious with compliments. Once, puffed up with the success of my copywriting, I asked him how he liked my sales letter. “Porter,” he told with a slight smile, “it was as good as anything else you’ve ever written.”
Today’s Chart: The Permanent Portfolio (PRPFX)
Pacific Heights Asset Management oversees $3 billion using an allocation strategy that’s based on Harry Browne’s Permanent Portfolio. This version has 20% of its assets in gold, 5% of its assets in silver, 10% in Swiss francs, 15% in real estate and natural-resource stocks, 15% in aggressive growth stocks, and 35% in bonds. It’s up 14.5% so far this year and has a five-star rating from Morningstar.
The Mailbag
As a longtime subscriber going back to Pirate Investor days in the 1990s, and a proud Stansberry Alliance member since you started that program, I was thrilled to get your Porter & Co. email announcing your Daily Journal 3x a week!
I’ve always looked forward to reading your comments going back to Friday Digests at Stansberry Research and since… and now I get to do so multiple times each week.
In the mid-1990s, I started investing and tried out multiple newsletters – Navellier, Murphy Financial Services, Louis Rukeyser, George Gilder, you, and a few others I’ve forgotten. I tracked the results and what became clear after a few years was that you were the best with Gilder in second. Now, I only have four investment subscriptions – Stansberry Alliance, Gilder, TradeStops, and Porter & Co. After joining the Alliance, there’s no question the Stansberry family of stock newsletters is without peer. Favorites include Extreme Value, Extreme Wealth, Forever Portfolio, and Stansberry’s Investment Advisor. I’ve developed quite a base of investment knowledge over the past 30 years, the vast majority of which came from studying your work.
My longtime investment “advisor” at Paine Webber, now known as UBS, provides me a discounted platform as a courtesy, and maybe 2% of my investment knowledge. The other 98% comes from learning from you and your family of newsletters… thanks so much for helping me learn how to become a pretty savvy investor. I only wish I’d known about trade stops in the late 1990s – live and learn. Thanks for providing the Daily Journal going forward.
Best,
– Jeff
Porter’s comment: Jeff! Wow, what a wonderful note.
I am so happy to know that you’ve gotten so much out of our work. Thank for letting me know. I sincerely appreciate it. Hope you won’t mind if I forward your comments to George (Gilder). We are old friends.
Thanks again… made my day!
Porter
I’m happy to hear about the new Daily Journal. I’m 20-plus years into my affiliation with your business, and am happy to read more of your thoughts on a regular basis. It’s not that I need any more advice in my life or my investment activity, but there are actually many times when I find myself wondering, “What is Porter thinking about today?” I set aside mornings for coffee and managing my nest egg; which means 97% reading, 2% “wondering,” and 1% action.
I’m only a few years older than you, but have committed to my retirement (for now). I’m grateful that you are still doing the hard work of managing your publishing business because I feel my efforts are, and have been so intricately linked to it for so long.
My sincere appreciation goes out to you and your team!
Regards,
– Jim S.
Porter’s comment: Thanks for your note. I’m grateful that I get to serve subscribers like you.
Porter
I really like the easygoing way you write. Reading it is quite enjoyable. I’m not a paid subscriber yet, and I prefer not to own stocks due to a lack of knowledge about them. However, I do trade commodities. I’m curious why no one writes about trading this class of assets. Any insights?
– Bill
Porter’s comment: I’m not saying you can’t make money – even a lot of money – in commodities, but it isn’t as easy as just buying a great business and letting it compound. Maybe that’s why you can’t afford to subscribe? Just sayin’.
Porter
I have been with you since you started Stansberry Research. I am very glad to see that you are writing weekly again. I miss your Friday communications. I am 60 years old and have learned everything about investing from your research. I wish I knew when I was back in my 20s what I have learned from you in general. It seems like your push is to have partners in your business. Becoming a partner is not something I would ever be interested in, but I hope you still have an avenue for guys like me who have been very loyal to you to continue to get your research in the future. Keep up the great work.
– Troy
Porter’s comment: Troy –
Thanks for your support. Much appreciated –
Porter
P.S. In this week’s Porter & Co. Spotlight, we brought you a second piece by Tom Dyson, who Porter calls “the greatest investor you’ve never heard of.” In it, Tom talks about how to best prepare yourself for what he believes will be an upcoming cascade of crises… and he passes on a way to insulate your portfolio from weakness in the U.S. dollar. Read more here.