If you are like me, you have probably been rubbing your eyes, cocking your head to the side and looking perplexed. No amount of CNN or Fox News, depending on your political perspective, can sooth the gnawing feeling in your stomach that something is not right, something has changed!
Our founding fathers regularly gathered at taverns to discuss the politics of the day. There were surely differences of opinion, but somehow, in most cases, they were able to discuss those differences and agree to disagree. But not today, we are strongly divided today, and it appears to me there is little tolerance for opposing points of view. It is “my way or the highway buddy!”
The pandemic has not helped as it is now harder than ever to meet and gather to discuss the news of the day without of proper mask or social distancing. Even the favorite meeting places of our founding fathers (the local bar or tavern) are now closed or only partially open due to the virus.
Life has certainly entered a “New Normal” or paradigm and it’s much more stressful, at least to me.
However, what seems like chaos is really part of God’s bigger plan and the changes in our attitudes towards one another and our economy, part of cyclical changes that have occurred in the past and strangely tend to repeat themselves throughout history over and over again.
The Coming Cycle
Although we can paint a short-term picture of rising markets, which will benefit investors, we would also like to counter that optimism with what we believe is knocking on the proverbial financial door and that is a more difficult cycle.
In a whitepaper entitled, The Allegory of the Hawk and the Serpent, the hedge fund group, Artemis Capital Management, makes the case in a 100 year back test of the markets that there are periods of secular growth and periods of sec
The secular growth stages they call The Serpent. They define these periods as times when secular growth is driven by positive demographics, economic expansion, technological innovation, globalization and economic prosperity. These periods eventually become corrupted by greed, as fiat devaluations and debt expansions replace fundamentals as the drivers of asset price gains that are not unlike a Serpent devouring its own tail.
The Hawk signifies the forces of secular change and ultimately destroys the corrupted growth cycle of the Serpent. The left-wing of the Hawk represents the deflationary path, whereby an aging population leads to low inflation, faltering growth, a financial crash and then debt default. The right-wing of the Hawk represents inflation, fiat default, and helicopter money. According to the writer, neither path is mutually exclusive, and they often occur sequentially.
The reason we are outlining these secular forces is that we believe the cycle is changing and we are transitioning from the Serpent to the Hawk. This transition will be more challenging and involves a different approach to money management than what has worked so effectively over the past 30-40 years.
The Under-Performance of Traditional Portfolios
I was recently on a client call with an investment manager in Pennsylvania. I raised the possible scenario of declining equity markets and rising bond yields (causing bond prices to decline). I asked what happens to your so called “safe assets” (i.e. bonds) if this scenario unfolds?
Their response was “that they build portfolios for the long-term and that over the long-term a pure equity and bond portfolio complement each other and produce good risk adjusted returns.” Now I don’t disagree with this statement, but how do you define long-term? If it is longer than ones working lifetime (time to save) then it is really of no value to the average investor in my opinion.
It seemed to me to be rather a close-minded response, especially when I asked if and how they might transition the portfolios for rising commodity, precious metals or volatility in the coming years should we transition to a more inflationary environment or even a stagflationary environment?
As you can see from the Artemis Capital graphic below that during a transition from the Serpent to the Hawk, we tend to be at secular lows for volatility, correlations and yields.
These above lows are what propelled traditional equity and fixed income portfolios to new highs but with these market constructs now moving off the lows and potentially higher, it is time to think differently.
We cannot do this paper justice in the time and space we have in this blog update, but the bottom line of their research is that periods of deflation and then sequential inflation require the traditional portfolio of stocks and bonds be augmented with holdings in precious metals, commodity trend following and volatility trading strategies to perform well in the New Normal of the secular Hawk.
The following chart from the Wall Street Journal demonstrates just that for the inflation side of the equation:
Notice how the S&P 500 and Intermediate Bond returns suffer in such an environment.
The whitepaper instead argues that non-correlated holdings in precious metals, commodity trend following and volatility trading work with the traditional equity and bond holdings to stabilize returns and reduce risk in the Hawk period, as seen below.
They further make the point that a portfolio that is roughly equal in allocation between equities, bonds, precious metals, commodity trend following, and volatility trading has outperformed the more traditional 60% equity and 40% bond portfolio over the past 100 years, especially in the Hawk periods and likely will do so again in the coming Secular Hawk period. They call this portfolio a Dragon Portfolio (see below).
We are not trying to scare you with this information, instead what we are suggesting is you need to make sure your investment advisor or manager is focused on this potential cycle change and has a plan for when and how to transition your more traditional stock and bond portfolios into other more favorable asset classes, like commodity trend following, precious metals and volatility trading, when the time is right.
A pure stock and bond portfolio will likely struggle in this cycle’s periods of alternating deflation and then inflation as seen in the chart below, especially in the periods like 1964-1983 when stagflation was prevalent.
On the other hand, our trend following models are already hard at work identifying turning points whereby equity portfolios need hedging or fixed income portfolio duration should be neutralized (i.e., hedged).
Those same models are also used in determining the best time to be in assets that benefit from deflation (where we are now) and inflation (where we expect we will be in the future). We have even rolled out a brand-new portfolio similar to the Dragon Portfolio outlined above to help clients best thrive during the coming cycle.
So, when you sit down with your investment advisor or manager and you ask the question I asked above and they give you same kind of close-minded response, maybe it’s time to explore your options? As you can see in the above 100 year back test from Artemis, such a close-minded approach could be extremely costly to your portfolio(s) in the future.
Let me know what you think in the comments section below.
When I was growing up, my father would constantly chastise me to “get a job, you need to pay for one-half of your college education.” Although his education policy was clear, I found this approach tended to emphasize making money over extracurricular involvement.
As a result, I had an egg route at age 14. A paper route at age 16 and worked at a Kroger in Indianapolis as a bag boy (or a Courtesy Clerk in today’s more politically correct world). I later worked every summer during college including stints as a house painter, a bakery oven construction worker and a pizza chef for Godfather’s Pizza. That is the same chain that the recently deceased Herman Cain was famous for turning around.
The emphasis in my case was purely on the money side. On the positive side, it did help me limit my student loan debt to a mere $2,500 upon graduation. Yes, I know the joke…what would that be in today’s dollars? Ha ha!
With my kids, I was a bit less stern. The idea was they would pay around half their education but with many jobs unavailable until 18 or after and the fact that my kids were not the entrepreneurs that I was, they were allowed to pay for their half with student loans and grants or scholarships.
What is your policy?
Whether it was my education or that of my kids, in both cases, we were provided, or we provided, a clear policy towards college and post graduate education.
With so many kids approaching college, getting ready to head to college or just logging in for college, do you have an Education Policy?
Let me give you four (4) reasons why you should:
What does a sample policy look like?
Here are a few examples, but I would encourage each couple or parent to develop their own policy for their own special circumstances.
Policy Example #1
When you finish high school, you are on your own. Your parents do not have the resources to help you so you should focus your energies on getting the best grades you can so you can get as many grants and scholarships as possible or consider other alternatives, like community college or trade school, where you can work while in school to pay for those costs.
Policy Example #2
We will pay for 100% of your educational costs for a four-year degree from an in-state college or university, including tuition, fees, room, board and a monthly stipend. We will only pay up to the cost of attending a four-year, in-state college or university, including the above items, should you choose to attend an out of state institution. Essentially you will be responsible for the difference in the total cost over and above the total four-year cost of a similar in-state college or university.
We will not pay for any post graduate costs but will credit and pay for some of those costs up to the amount of scholarships or grants you earn during your undergraduate program at an in-state school.
Policy Example #3
We will pay for 50% of your educational costs for a four-year degree from any college or university, including tuition, fees, room, board. We will also provide you a monthly stipend to cover any other costs.
We will not pay for any post graduate costs, that will be your sole responsibility.
I can go on and on as there are lots of possibilities. However, the key point is that it is important to develop such a policy that is uniquely yours and to make your children aware of such a policy as early as possible.
I know there are going to be those out there that say this puts too much pressure on a child, but I would argue it also provides clarity. It allows the parents and the child to start discussing what might be the child’s responsibility and how they can prepare, such as work in high school or college. Finally, it may incentivize the child to work harder in school to take advantage of all possible grants or scholarships if college is part of their plans.
Obviously, every child is different, and it is tough for most teens to know exactly what they want to do with their lives, but a well-crafted education policy will provide for a dialogue if nothing else.
Let me know your thoughts in the comment boxes below.
Let Them Eat Cake!
In the late 1700s famine spread across the land in France. The monarchy of the time seemed to have little tolerance or sympathy for the starving poor. The story goes that the people of France were starving following a poor harvest and a rodent crisis that led to a shortage of the staple of the time, flour, and consequently bread.
Allegedly upon hearing the news, Marie Antoinette, the wife of King Louis XVI, uttered this now famous phrase “let them each cake.” As cake (really brioche when properly translated) was more expensive than bread, the anecdote was clear evidence of just how out of touch she was with the lives of her subjects.
Although we are lucky enough today to not be in the middle of a famine in the U.S., we have the same kind of unrest today that must have been present in France at the time. One would guess a desperate peasant class was up in arms with the royal aristocracy and starvation was a powerful catalyst for their unrest.
Today, we have the Black Lives Matter movement front and center. The catalyst for this movement was the viral video of police brutality against George Floyd in Minneapolis. This group, and others that have infiltrated their ranks, are today locked in what seems like a never-ending struggle with the ruling class of our time, the government at all levels and their enforcers, the police.
I am not going to take a side in this ongoing dispute but to say that the 2016 Netflix film, 13th, was an eye opener for me. One I would not have seen if not for the insistence of my 20 years old daughter. I would highly recommend it. Not as absolute truth, but as a film that broadens the thinking and at least allows one to look at the protests with greater objectivity.
If we go back in time even further, the children of Israel in the book of Samuel in the bible, were complaining that they wanted a King just like all the other peoples on the earth at the time. In Samuel 8:11-20, Samuel warns the people about what a King would do to his subjects.
He said, “This is what the king who will reign over you will claim as his rights: He will take your sons and make them serve with his chariots and horses, and they will run in front of his chariots. 12 Some he will assign to be commanders of thousands and commanders of fifties, and others to plow his ground and reap his harvest, and still others to make weapons of war and equipment for his chariots. 13 He will take your daughters to be perfumers and cooks and bakers. 14 He will take the best of your fields and vineyards and olive groves and give them to his attendants. 15 He will take a tenth of your grain and of your vintage and give it to his officials and attendants. 16 Your male and female servants and the best of your cattle and donkeys he will take for his own use. 17 He will take a tenth of your flocks, and you yourselves will become his slaves. 18 When that day comes, you will cry out for relief from the king you have chosen, but the LORD will not answer you in that day.” 19 But the people refused to listen to Samuel. “No!” they said. “We want a king over us. 20 Then we will be like all the other nations, with a king to lead us and to go out before us and fight our battles.”
Today we are under the thumb of a government and its monetary system. Like the kings of the times past, our system does many the same things as in Samuel’s time and a couple things that they did not have to deal with including a Central Bank over its money supply.
I mention the Central Bank because I believe much of the class war, we have today is due to this one non-government organization. The Central Bank is a relatively new concept that was brought to the U.S. from Europe in the early 1900s.
Our founding fathers were against the idea of such an institution. They reasoned that there was no reason for an organization to issue and control the money supply on behalf of the U.S. government and its depository institutions. However, enough palms were greased that the U.S. Federal Reserve was finally born of out of the Federal Reserve Act of 1913.
Why were our founding fathers against a Central Bank? I think Mayer Amschel Rothchild said it best, “permit me to issue and control the money of a nation, an I care not who makes the laws!
The Central Bank and our government have been integrally aligned ever since. The problem with a Central Bank, as we have seen in recent years, is that they don’t work for us. It may appear that they do, but they don’t. Their programs and intervention in markets many times serve a purpose that does not align with the 99% but the 1%.
How do these programs lead to inequality?
Central banks pull several levers in their management of the economy including interest rates, bank reserve requirements and money supply. In recent years, to spur growth and allow its member banks to repair their balance sheets post the Great Recession, they have kept rates very low and been highly accommodative with their stimulus programs. This has benefited the wealthy, while hurting the saver, who has received very little interest on their excess savings while “stealth inflation” has squeezed the 99% amid an extended period of wage stagnation.
I say stealth inflation because the government changed the methodology in 1980 by which inflation is measured in the Consumer Price Index (CPA). Thereby understating the effects of inflation on the economy. Since CPI is used to determine annual adjustments to social security to the increase in employer wages, this has resulted in stagnation of wages while the real level of inflation has been much greater thereby squeezing our cost of living.
You can see this spread in the chart below courtesy of Shadowstats.com.
Likewise, the Central Bank has promoted lending programs that make colleges and universities affordable to the masses. The problem is that their buddies at those same colleges and universities have used the plentiful loan programs to boost tuition and fees, enrich their tenured professors and embark on massive expansion programs. We are already seeing a backlash here as students are taking legal action against those same universities for fees paid them during the pandemic without the receipt of proper classroom learning.
In other words, they have stacked the deck against us. Is it any wonder that the masses are rioting?
If you look at the pictures of those rioting, it is not just black Americans. It is Millennials and Generation Z who lost their jobs during the pandemic.
Why are they there? My theory is that it is not just black Americans that feel their government have abused their responsibilities towards them, but it is much of our younger generations that feel the squeeze of rising inequality, while being saddled with student debts they will have a hard time ever repaying in this low growth economy. This economic squeeze inevitably leads to a cycle of unrest just like in Marie Antoinette’s day until the tide is turned and the inequality is addressed.
What do think? Leave me your comments below.