Reality Sets In

Back on December 22 I described a way to turn the fiat fantasy portfolio more conservative over time.  The key to the strategy was ranking the risk of the asset classes.  Frankly, I did a poor job with this ranking, failing to even consider the basis of the portfolio.  For example, I listed cash as a very conservative asset class.  But if cash means dollars, and if you're talking investing for years, is increasing dollar holdings conservative?  I don't think so.  Here is a revised list of the portfolio asset classes by risk (from low to high):

PRECIOUS METALS (15)
HARD ASSETS (15)
REITS (10)
YIELD GENERATORS (10)
***********************
PROFESSIONAL ALLOCATORS (10)
EQUITIES (15)
BONDS (20)
DOLLARS (5)

This may all be faulty logic, but at least it's more consistent with our approach. 

I'm not sure what made me think of the change.  When I had a little part-time business one of my more candid and well-to-do customers said her biggest fear was being old and poor.  I thought how silly given her situation, but here in Florida there are legions of poor old people.  Their income has not changed but their living costs have risen.   

Or maybe it was snippets like this, courtesy of Zerohedge:

   Bill Gross had a great sound bite at Forbes' annual investing roundtable:

I don't know if the U.S. has reached a desperate point, but it is employing instruments and vehicles and policies that smack of desperation. We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings. We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential. And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default. Ultimately creditors and investors are at the behest of a central bank and policymakers that will rob them of their money.

  Gross' statement came right after the following zinger from Marc Faber:

Janet Yellen, vice chair of the Federal Reserve, said about a year ago that if it were possible to push interest rates into negative territory, she would vote for that. This is a very important statement because it implies that the Fed will keep real interest rates negative as far as the eye can see. Negative real rates amount to expropriation and destroy one function of money: to be a store of value and a unit of account. If you measure the stock market not in dollars but gold, it is down 80% since 1999. I no longer regard the U.S. dollar as a valid unit of account. People shouldn't value their wealth in dollars because one day, in dollars, everyone will be a billionaire.  

Then I clipped this quote from Richard Russell of the Dow Theory Letters from somewhere:

Gold pays no interest because it is ultimately safe. Gold is the only currency that has lasted through the centuries, going back 6,000 years. Currencies have to pay interest so that they will be attractive enough for people to hold them. As a rule, the poorer and riskier the nation, the more its currency must pay in interest in order to attract investors. Normally, the dollar would be paying an attractive rate of interest, except for the manipulations of the Fed. Thus short rates in the US are around zero, courtesy of the Fed.

The United States has been living with a completely fiat currency since 1971.  Going about daily business, one doesn't see many reasons to be overly concerned.  There's food on the shelves and fuel at the gas station.  Prices are going up, but not radically nor suddenly.  The debt is a gizillion dollars, but who can appreciate a gizillion of anything.  Still, writers and others I trust make a convincing case that our financial and political systems are in a terrible mess.  Coping with this reality is going to require unorthodoxy and conviction.