I recently got a 2* review of my book on the Ultimate Liquidity Portfolio (ULP) where a reviewer named MysteryMan22 said “In an inflationary environment like the 1970s, I suspect this allocation would have been horrific”.

MM’s comment inspired me to dig deeper into the 9 decades worth of historical data my co-author and I had presented in the book.  We then improved our data by including not just at the NYU data set, but the data from portfoliovisualizer.com.  This resulted in some adjustments to the numbers, but the conclusion remained the same:

The 1970s was indeed a terrible decade for the ULP in real terms.

This is due to three large inflationary shocks in the 1970s:

The first was that the US exited the Breton Woods system, which had pegged the value of the dollar to the price of gold.  This caused the dollar to crash in value relative to other currencies and relative to the price of gold as the government printed more money.

The second was the 1973 oil embargo imposed by OPEC.  This roughly quadrupled the price of oil, which raised production costs for manufacturers and increased gasoline prices.

The third was the 1979 Iranian Revolution, which caused the price of oil to double again.

But don’t put your money back in cash!

In spite of this brutal set of shocks, the ULP performed roughly the same as cash for the decade (actually it did slightly better, but let’s call it a statistical tie).  And since then, cash has not been able to keep up – it’s lost to inflation every decade since.  Yes - in the ULPs worst period, it still managed to tie cash.  And it’s done better in every other decade.

I believe it’s extremely unlikely that we get hyperinflation again

I’m personally not concerned about repeating the 1970s performance of the ULP.

The most recent hyperinflation in the United States was over 40 years ago, and it was driven by three major events, one of which cannot be repeated (you can’t break the gold standard twice).

Additionally, our economy is increasingly service based vs. product based.  Services such as technology, banking, and media tend not to have the same amount of cost-driven price pressure.  So the more our economy becomes detached from physical goods that have constraints, the less pressure there is to raise prices due to costs.

Technology, which is a growing part of the service sector, is deflationary.  First, technology itself tends to fall in price (for example, computing costs fall by about 50% every 18 months).  Second, technology itself usually enables efficiency gains and cost reductions.

Finally, it has proven very difficult to get inflation up in a low interest rate world.  The US Federal Reserve has been trying to stoke inflation for at least the last 12 years, and only a couple of times managed to get meaningfully above 2% after which it dropped again.

Consider the sad case of Japan.  It entered a low interest rate environment in the late 1990s and since then, nominal prices have increased a TOTAL of 2%, or less than 0.1% per year.  Every few years we get hopeful articles like this, but so far, no amount of genius or encouragement has helped these poor bankers get prices up.

If you are still concerned about inflation, there’s a way forward, with tradeoffs

Our goal with the ULP was to help people move the roughly $9T dollars parked in money-losing savings accounts to a more productive, yet still low-risk, asset mix that had reasonable downside protection.  Such a change can unleash billions of dollars into the economy.

We did this by suggesting a very simple 2 asset portfolio.  3+ asset portfolios, although they have better return profiles, lose the benefits of simplicity and come with higher maintenance costs and more trading costs.

However, if you are worried about a return of hyperinflation and are willing to take the additional complexity, the ULP is improved if you move 6% of your money from bonds into gold, or

82% Intermediate term treasuries (VGIT)

6% Gold (GLD)

12% Total US Stock Market (VTI)

This 3 asset equivalent gets better returns (averaging about 0.2% per year over many decades of data), without sacrificing the stability, low volatility, minimum drawdowns, and high win rates of the ULP.

And, it would have performed about 3% better per year during the hyperinflationary 1970s.