This is a very complex Macro environment due to Federal Reserve interventions, Government stimulus programs and fuzzy economic numbers that reflect the will of the party in power in Washington.
 
Quite frankly, the last ten months for me have been very challenging.  It was only recently that I stood back and tried to take a much longer, big picture view of the Macro landscape here in the U.S. that I think will frame how we tactically manage money for the next decade or more here at InTrust Advisors.
 
What is that framework?  Here it is:

No. 1.    The U.S. Government cannot repay its debt and lacks the will to do so. 
 
No. 2.   The elected leaders in Washington will continue to print money, grow the size of the national government, and raise the U.S. debt levels because the alternatives (balanced budgets, debt repayment, downsized government, etc.) are just not something they want to stain their term in office and ability to seek reelection!

​
​No. 3.    Due to weak wills and misplaced objectives, the U.S. will have no choice but to inflate away its debts.  It will not risk default, nor will it move away from the path of bigger government and more for all.
 
No. 4.    Traditionally foreigners have been big U.S. Treasury buyers.  No longer, they are headed down the same path or they are seeking to separate themselves from the dollarized world and they will not be big treasury buyers going forward as you can see in the chart below.

​​No. 5.    The U.S. Government cannot allow interest rates to continue upward.  The interest carry will continue to compound and become just too big a part of the U.S. budget.
 
No. 6.    The Federal Reserve will be the only big buyer of treasuries and that means currency debasement to do so (i.e., a falling dollar).  This debasement may be hidden by a race for the bottom with other countries and currencies, but I think this is a race we will win!
 
No. 7.    The U.S. will use financial repression to debase its currency in a controlled fashion.  However, it could spiral out of control and lead to runaway inflation.  Financial repression is a term that describes measures by which governments channel funds from the private sector to themselves as a form of debt reduction.   Financial repression here could be paying a return on treasuries that is less than zero after adjusting for inflation whereby they slowly rob citizens of purchasing power to lower debt levels in nominal terms.
 
No. 8.    U.S. residents could become U.S. treasury buyers in retirement plans or pensions.  This will be sold to us as a way of protecting retirement savings but really would be about finding a home for this ever-increasing pile of debt.  Japan’s citizens do this willingly.  It’s likely here in the U.S. this will be legislated upon us.
 
No. 9.    Treasuries will no longer be a store of long-term value.  They will need to be more actively managed and over time will lose some of their luster as rates are held down while inflation rises (i.e., financial repression).  Also 40 years of falling interest rates has led to a fixed income being a larger part of every portfolio, rising rates over the next few decades will do just the opposite.

​No. 10.  Gold, commodities, and hard assets will once again become important holdings for Americans.  The diversification of holdings into more than just stocks and bonds will become increasingly important.
 
In summary, we are on the verge of a shift in our country’s financial outlook like we have not experienced in many years.  The last such period was probably the late 1960s and 1970s.
 
This may seem like gloom and doom but for every challenge there are opportunities as well!  Let us know if we can help you unlock those opportunities.

Disclaimer:
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.

​Does it seem like the world has gone crazy? 
 
Just recently, we have witnessed Russia invade another sovereign nation in real-time and the coordinated response of just about every other nation on earth to that act.  The poor people of the Ukraine I believe would argue that response has fallen woefully short, but that is an article for another day!
 
Maybe you recently had a family gathering where some poor sole (usually me) brings up the wrong issue at the wrong time (usually politics or religion are good bets) and the entire event devolves into a war of words and hurt feelings.  When have we been more divided and unwilling to meet in the middle?
 
How about the truckers in Canada?  In free societies, you should be able to voice your displeasure with your government that is supposedly “for the people and by the people” or I assume that should be the case in Canada.  However, instead those truckers were arrested, and their trucks and assets confiscated for expressing those same freedoms!  I repeat, “has the world gone crazy?”
 
In my study of past market history, it appears to me that we have entered a cycle or war and conflict like the early part of the twentieth century.  This is a change from the last 40 years of relative calm!
 
We have blown financial bubbles about as far as we can blow them.  We have rewarded the rich and punished the poor and middle class.  We have dug ourselves under levels of debt never before seen and now is the painful time in history where these secular excesses must be righted.

​For Americans, this last happened in the late 1920s and early 1930s and resulted in the Great Depression and the Stock Market Crash of 1929.    Are we looking at the same risks today?
 
Some call this period in long-term cycles, the Fourth Turning, as outlined in the book by the same name by Strauss and Howe.  The Fourth Turning is a Crisis. This is an era of destruction, often involving war or revolution, in which institutional life is destroyed and rebuilt in response to a perceived threat to the nation's survival.   Notice that institutional life is destroyed (code for turned upside down) and rebuilt (code for painfully restructured).
 
As investors, we must realize this period can seem apocalyptic, but it is also full of opportunities, but we must change our institutional processes and cannot stay stuck in what worked the last forty years.   We must adapt!
 
A frequently referred to white paper by Artemis Capital Management entitled The Allegory of the Hawk and Serpent did a great job of identifying these cycles and what worked historical over the past 100 years through all cycles.  They called this Fourth Turning “the Hawk” in the white paper and identified it as the end of a corrupted growth cycle.  They called it a period “where extremes exist including a deflationary path, whereby an aging population leads to low inflation, faltering growth, a financial crash and then debt default.”  Further, they highlight that this path “might be followed by an inflationary period, with fiat default, and helicopter money.”  Neither path is, they say, mutually exclusive, and they claim they occur sequentially.
 
In their analysis, they called these periods “Secular Declines.”  Some say a picture is worth a thousand words, so let’s see what worked in these periods.  Let’s start with interest rates (i.e., Fixed Income) and equities (the institutional processes of the past 40 years).

The period of Secular Decline is on the far left and it has begun on the far right, according to Artemis Capital Management. 
 
What you can see is equities produce meager returns over the complete cycle compared to other cycles and historical averages for returns.  Interest rates stay so low they don’t reward investors at all.  In fact, after factoring in inflation they were likely negative real rates (i.e., yields less the rate of inflation).
 
I would also speculate that passive management of assets is also bound to underperform during these periods due the rise in volatility (outlined below).  If rates were to stay as low as in the 1929-1946 period, fixed income (i.e., bonds) would also be traded and I would argue alternatives found for some of that allocation.
 
Artemis makes the case that volatility picks up and interest rates start to rise, while valuations must fall for equities in Secular Declines.  This all seems pretty basic when you consider that equity valuations have never been higher, interest rates have rarely been lower, and volatility died during the past decade and only recently has it started to rear its ugly head again.
 
Artemis then shows what has worked during Secular Declines.   
​

I don’t believe this means buying and holding the Volatility Index or VIX, but rather the active trading of volatility spikes by buying low and selling high and the reverse for those who can short.

​When I came into the business 25+ years ago, commodities were part of most portfolios.  It is amazing how poorly they performed since 1984 and how recently we have witnessed a resurgence in such holdings.  Could this be the start of a new commodity super cycle as was the case in 1927 to 1946?

​Gold, likewise, has been pretty quiet the past decade or two.  We are just now seeing gold and precious metals starting to perk up.  Could this be a time for them like the Secular Decline of 1929-1946 or more probably 1964-1983 when there was rampant stagflation?  I reference the latter because the former was dominated by the peg of gold to a price of $35 per ounce as it was a very important part of the monetary picture.  Today, gold does not back any currencies that I am aware, and it is more of a hedge against on unsound budgets and fiat currencies.

Finally, we have Treasury Bonds, which did surprisingly well.  I believe you can point to the exceptionally low interest rates during the 1929-1946 period for that result.  I personally believe fixed income must be traded in the current Secular Decline.  Held when rates fall and traded out of or hedged when rates rise.
 
Unfortunately, no two periods of time are exactly the same or you would just buy the four asset or asset classes above and be set.  But no, it takes a keen knowledge of the past and I believe a quicker finger today to move to the right places, especially during periods of institutional destruction like we are experiencing at present.
 
This is where we come in, we can help you survive and maybe thrive.  We have both active and passive solutions that we combine into total solutions for clients.  Our passive solutions include alternatives in the areas outlined above plus more traditional holdings.
 
Let us know if we can help.
​

​Can you remember the time as a kid, or even with your kids today, that you purchased a container of bubble solution?  The idea was simple, dip the applicator into the bottle, pull it out quickly and then blow into the applicator hole and watch the bubbles appear.

​Oh, the joy of blowing bubbles and then watching them settle everywhere!
 
Unfortunately, every bubble popped!  It didn’t matter whether it was a little bubble, or the giant bubble produced by some kind of larger wand!  They all popped!
 
They either popped in air or popped hitting an object, like a blade of grass, but they all popped.  It was just a matter of when, not if!
 
The same can be said of economic bubbles, they all pop eventually.   We saw the Dot.com bubble pop in 2000.  The great recession bubble pop in 2007.  Now it is just a matter of time until this one, “the mother of all bubbles,” pops.  When it pops, watch out!
 
I have written a lot over the years about this bubble!  It has been a challenge for anyone but those willing to put their full faith in the Federal Reserve (the “Fed”) and “buy the dips.”  The scary part is this is the only market many investment managers have ever seen.  The type that goes up, never stays down, and that recovers almost instantaneously from any dips.
 
In blogger Charles Hugh Smith’s recent Zero Hedge article entitled “The Moment Wall Street Has Been Waiting For: Retail Is All In”, he makes the case that this bubble has moved to a very dangerous stage, the “All-In” stage. 
 
This according to Mr. Smith is because up to this point, “the old hands on Wall Street have been wary of being bearish for one reason, and no, it's not the Federal Reserve, the old hands have been waiting for retail, the individual investor, to go all-in stocks. After thirteen long years, this moment has finally arrived: retail is all in.”
 
He further makes the case that all you need to do is look at the investor sentiment, record margin debt levels and the Buffet Indicator (chart below) to see that we are at extremes.  He makes the case that current valuations are “so extreme that the previous extreme in the 2000 dot-com bubble now looks modest in comparison.”

Now Mr. Smith may have a point, but the critical thing about bubbles is they tend to go on much longer and go much further than most would ever imagine.  Yes, we are thirteen years into this one, but does the Federal Reserve and our happily complicit officials in Washington have a choice, but to keep this one going through new spending programs, like the $1 trillion infrastructure bill now heading to the Senate, or the asset purchase programs in place by the Fed.  In doing so, they are just blowing bigger and bigger bubbles.  Ones that when they pop will hurt all but the nimblest of investors.
 
Charles Hugh Smith lists off a number of warning signs in his article that he believes to points to a possible crossroads for this current market bubble.  Signs that are not new but happen at most tops. They include:
 

• Financial advisors abandoning bonds for FANGMAN stocks and advising their elderly clients to change their allocations.
• The hubris of inexperienced traders that are supremely confident they can’t lose.
• The total collapse of risk management as 13 years of Fed intervention has emboldened retail investors.
• The rise of meme stocks, and the social media retail investing herd.
• The secular religion that stocks never go down and that the Fed will never let the market go down.
• Market and stock fundamentals that don’t matter.  The thesis that technical analysis is a waste of time.  Just buy the dips!

 
He wraps up the article by stating that these confident investors, the Robin Hood investors, do not realize one thing, they are “the marks and bag holders.” 
 
This market saga is not new!  It happens over and over again, and Wall Street is a pro at drawing in retail investors who ultimately become overconfident, buy and hold or buy every dip, only to leave them holding the bag at the top of the market while they head for the exits.
 
My friends, I would agree with Mr. Smith that we are approaching that proverbial “fork in the road” when markets top out and buying the dips no longer works.    The question is not if, but like the bubbles you blew as a kid, when they pop!
 
So how do I put a positive spin on this gloomy forecast?  I would like to give you some simple ideas that might help you avoid holding the bag or being the bagman.  They are not earthshattering, but they are tried and true!

1. Know your time horizon!  If you are close to retirement or near the point where you need to access these funds, you need to be shifting a larger and larger percentage to safer, liquid investments, even if they don’t pay as high a return.

 

1. Have a plan.  Just like a plan is important to any business, so is it important to have a plan on how you will approach the next bear market in equities.  Will you stay put?  Will you sell and move aside in tax deferred accounts only?  Will you hire an advisor, like us, to help?  You need a plan!

 

1. Diversify.  Diversify by asset class and by the manor by which your assets are managed.  It is ok to be passive invested, but you should balance this with assets that are more actively managed.  Consider broadening your allocation into commodities, currencies, precious metals, and other non-correlated asset classes as a means of protecting assets and profiting from a changing cycle.

 

1. Look for the lay ups.  The market has been so strong that it is likely future returns will be lower as a result in a movement back to the mean for returns.  Where can you capture guaranteed returns as a result.  Could paying off or down a mortgage capture a guaranteed 4% return?  How about higher interest credit or consumer debt?  If you can save 10% or more in paying down that debt, in my mind, it is a no brainer!

 
Of course, we are here to help.  If you would like to talk, just click here or give us a call.

When I first entered the business way back in 1995, it was quite common to look at portfolios and see a diverse set of assets including precious metals, commodities, hedge funds and CTAs, as well as, equities and fixed income or bonds.
 
Over the past ten to fifteen years however, the amount of market intervention by Central Banks and from global governments has made such diversification almost mute.  Today, it’s much more common to see just portfolios of stocks and bonds.  Investments in precious metals, commodities, hedge funds and CTAs (for the most part) have been underperformers.  A loser’s game!
 
I mean had we all known then what we know today, we would have all just bought the S&P 500 index right?  We would have learned to deal with the market volatility knowing that each market decline would spawn a reaction by global central banks and governments to prop back up the ailing markets.  However, as we all know hindsight is 20/20!
 
I still marvel at why such parties cannot let the markets do what they do best, i.e. run in cycles of boom and bust.  The busts bring sanity to the markets and help to eliminate the bad players.  They have to realize that when this managed market does end, it is going to end very badly for many participants, or maybe that is the plan?  Who knows?
 
My point is that a portfolio today that includes 60% equities and 40% bonds is not really diversified when stocks are at nosebleed valuations and bonds are at historical thirty-year lows in yields and near zero yields.  The protection that bonds now afford investors to hedge equity volatility is muted at best if not non-existent.  I can actually envision a scenario where both stocks decline, and bond yields rise, and investors lose money on both sides of the portfolio at once.
 
So, what is an investor to do?
 
Since markets are mean reverting, I believe we need to start to look to the past to move forward into the future.
 
This means a slow reversion back to portfolios that are more diversified and contain assets classes that have historically provided some shelter in the storm, whether that is equity market volatility, rising deflation or inflation, currency devaluations and more.
 
In a study that Artemis Capital Management performed in January 2020, they found that over the past 100 years it was common to have periods like we have had whereby growth reigns fueled by the virtuous cycle of value creation and rising asset prices.  The growth cycle began naturally through a combination of favorable demographics, technology, globalization and economic prosperity.  However, such growth eventually became corrupted by greed.  Fiat currency devaluations and debt expansion replace fundamentals.  Isn’t that exactly where we are today?
 
Those growth periods were followed by periods where the corrupted growth cycle was destroyed. This destruction led to a periods of either deflation or inflation, many times alternating from one to the other.  The deflationary path was caused by an aging population which leads to low inflation, faltering growth, financial crashes and then debt defaults.  The inflation cycles were led by fiat currency defaults, and helicopter money.  Maybe you recognize the helicopter money as the latest $600 stimulus checks just approved by the Congress?
 
During these latter periods of corrupted growth and intermittent periods of deflation and inflation, they found that traditional portfolios of 60% equities and 40% bonds underperformed.  What they found is that more diversified portfolios that included commodity trend followers, precious metals and volatility traders significantly outperformed the latter 60%/40% portfolios during these periods.

We believe we are in the latter stages of that corrupted growth cycle. 
 
The transition has to start now to more diversified portfolios that include more than just equities and bonds.  To more of the diversified portfolio like you see above that Artemis has called the Dragon Portfolio.
 
We will write on this later, but we also believe that means a renewed importance of having both passive index strategies and active investment strategies in your portfolio, a multi-disciplined portfolio as we call it.
 
Just like the latest fashions, what is old is new and what is new is old.  Funny how that works!
 
So, the question becomes “what’s in your portfolio?”  If this is not a discussion you are having with your advisor, it may be time to find a new advisor?  Let us know if we can help.

​Just a few weeks ago, the headline risk was all negative.  The narrative was that Covid-19 was spreading throughout the world in a second wave.  Countries were closing down again.  Would the U.S. be next to close down like in early 2020 and it was rumored this would most likely happen with a Biden win?
​

Speaking of the Presidential Election, the main-stream media did a pretty good job of fear mongering regarding that election.  What if Trump won?  Would there be rioting in the streets and general unrest?  The narrative went that such unrest could be very negative for your portfolio and for America!
 
Turns out the Trump has not won (at least not yet as he pursues legal action in various swing states).  Instead, Joe Biden appears to be the overwhelming favorite to assume the role of President come January.
 
Then recently, Pfizer announces a possible vaccine for Covid-19 with 90% effectiveness. Stocks of course are rallying like there is no tomorrow on the news and breaking to fresh highs clearing technical hurdles that just a few days ago we thought might lead to a market reversal.  

​The cynic in me wonders if Pfizer had a possible vaccine prior to the election but waited until Biden’s win to announce the trial effectiveness, but I digress.  Maybe it’s just me, but it seems the good news is now coming in batches.
 
No matter the reason, my point here is that the market will do what it wants.  It is an untamed animal that requires it be followed, not forecast. 
 
Why Forecasting Doesn’t Work?
 
Have you noticed how many guests on CNBC are clamoring to give their market forecast?  The reason is that it cost them nothing to do so, but if they are lucky enough to get it right, it could change their standing forever.
 
As I think back over time, I can remember a CNBC guest named Elaine Garzarelli.  She was credited with calling the bottom of the 1982 and 1984 Bear Markets and the top of the 2000 Bull Market.  However, where is she today?  I don’t even know.  You rarely see her anymore on any news channel.  I can tell you it’s pretty hard to get the calls consistently right or we would hear more from or about her.
 
The constant flow of news and changing market conditions is what makes forecasting markets so tough.  As an example, we have been using a service called Hedgeye to provide us fundamental data on global economies and the markets.  The founder of this group is a pretty brash guy named Keith McCullough.
 
He and his group are constantly updating their subscribers on the economic quad that they believe the data is telling them that we are entering.  Mr. McCullough bad mouths the Old Wall and investors who see the markets differently.   ​

​However, like Elaine Garzarelli before him, the constant change in the market narrative, the amount of market control now exercised by global Central Banks and the monetary policy (stimulus) that governments keep implementing has made their forecasts all but worthless.  We recently cancelled our agreement with them as a result.
 
The Key to Success
 
We continue to believe the key to success is to follow the market until it tells you the trend is reversing.  We call this Trend Following and it is something that is built into every portfolio we run. 

It is not perfect, and we usually give up some upside and give back some profits waiting on the signals.  However, it is a discipline and allows us to stay focused on the trend and not the short-term noise.
 
We like it for a number of reasons:

1. We are not just buying and holding through everything, which I believe may be a disaster over the next decade;
2. We have specific models that help put some science in the art of investing and give us a clear process where most managers have a very limited Macro process:
3. It works whether a market is trending up or down; and
4. We can use those models to help us determine how much exposure we should have to the markets.

This latter point I believe is one of the most important.  When the election approached, our models had us reduce exposure, which is good money management.  However, those same models did not have us out of the market.
 
Now that the market is rallying again, we are participating in the rally and not sitting on the sidelines.  Had some of the doom and gloom occurred that we mentioned previously, we would have limited downside risk. 
 
We may now be underperforming on the upside as we look for the right time to possibly add back some exposure, but we did what our clients pay us to do and that is to “manage risk” first and foremost and generate positive returns as a secondary goal.
 
Maybe our process could help you?  If so, please click here for a free consultation.