​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.

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.

​​Five Ways to Prepare for the New Normal
 
I am sorry I have not put up a new blog post in the last 45 days or so, obviously the world changed with the Coronavirus shutdown and it has affected everyone.
 
In our case, market volatility rose, client needs ramped up, and investor nervousness was heightened.  This led to a very busy quarter for us and our distributed workforce.
 
Additionally, some of the work we usually do during the summer was pushed forward.  Things are finally stabilizing.   Just like Punxustawney Phil, we are finally sticking our heads out of our burrows and wondering what happened to the world!

I was reading a article sent to me by one of my support staff recently called Leading Beyond the Blizzard: Why Every Organization Is Now a Startup where they used the terms Blizzard to describe the virus shutdown and Winter to describe the period we are now entering over the short to intermediate term.  They used the term Ice Age as the place we may be heading.  It was a somber piece with some great ideas for businesses of all sizes in the “New Normal.”
 
As a financial guy, I must point out that we were headed towards Winter with or without the virus.  Sequential quarter over quarter earnings and GDP were starting to slow and we were already in unprecedented territory with regards to the length of the economic expansion.  The pandemic just expedited the process and accelerated the pain for many unsuspecting individuals and businesses.
 
What was a key take away from the article is that everyone is now a start-up!  The point being that every business must now adapt, reinvent itself or die, even the large multi-national firms.  As I look out of our burrows, I see a new environment with new challenges in term and new opportunities.  In other words, a New Normal.
 
Here is a recent example, I went to the eye doctor recently and had to phone to get let in, wear a mask my entire visit and then have my hands sanitized on multiple occasions by the staff just to keep germs at bay.  This is not the world I used to know!
 
Something else we see are disruptions in supply chains.  We see tremendous government spending and interest rates that are now approaching zero (and being forecast to be negative by November).  This is not the old normal!
 
Internally, we are already a distributed workforce utilizing technology to stay lean.  However, we will be looking for ways to serve our clients with lower even costs and man hours while still delivering world class service.  In my mind, technology is again the answer!
 
Enough of me rambling.  Where am I going with this?
 
I think simply that the world has changed, and we all need to be prepared to think outside the box and be proactive, not reactive, to this New Normal.  Those businesses/families that see the new environment as a positive and adapt, will thrive.  Those businesses/families that attempt to stay the same will likely struggle.
 
The Leading Beyond the Blizzard article does a pretty good job of providing some basics for leaders as we move forward in “Winter.”  I want to give you five specific ideas or take aways that you can use in either your business or in managing your family wealth.

1. Nothing is free in life – right now the global governments are passing out funds and bailing out businesses like there is no tomorrow.  Unfortunately, those funds have a cost and ultimately, these same governments will be forced to raise taxes to pay the carry on those funds.  Now is the time to look for ways to reduce your taxable footprint.  Some ideas that come to mind quickly are utilizing private placement insurance or annuity products to reduce taxes on messy, tax inefficient investments.  Maybe looking at places like Puerto Rico, where there is a 4% tax on foreign business income, for back office operations to lower overall tax rates.

2. Digital currency is a place to be – My belief is that when global governments are debasing their currencies in unison (as they are now), a new financial pact and currency agreement is on the horizon.  Don’t be surprised if that next currency is digital.  Now is the time to take advantage of that possible change by being an earlier adaptor/investor in digital currencies.  The digital currency that the global governments will likely issue will be different, but it is coming as the world becomes more interconnected.

3. Debt is not your friend – some of you are discovering this right now.  Debt is not your friend; it is your enemy unless used prudently and judiciously.  A great deleveraging could be part of the future Ice Age.  Now is the time to seek to restructure your liabilities so they are more easily manageable in a world where revenues may be harder to grow or return to pre-crisis levels.

4. Deflation and inflation – In a recent post, A Possible Next Move for the Markets, I spoke about the possibility of deflation and then inflation thereafter.  I now believe there is a chance we will see both inflation and deflation at the same time until a future date where inflation likely overwhelms deflation.  Just look around, prices of many things like energy are falling but prices for things that you really need like paper products and food are continuing to increase.  In the past gold has served as an effect hedge against both deflation and inflation. Given the wave of government money printing, it could increase in value dramatically as one of the only forms of sound money.

5. Reexamine/Question Everything – now is the time to turn everything from your business to your personal life upside down and sideways.  Look at it from every angle.  Is what you are currently doing working?  Will it work in the New Normal environment?  Does it meet your personal goals and objectives?  Be prepared to try new things as Leading Beyond the Blizzard suggests and to possibly fail.  However, whatever you do, do not rest on your laurels! 

​So, what are your thoughts or comments?  I would love to hear them in the comments below.

​It’s been a long summer and thank God Fall is here.  Kids go back to school.  Traders return from vacation and market volume and sanity returns!
 
Summer is just no fun anymore for investment professionals and their clients!
 
So, the million-dollar or maybe billion-dollar question (adjusting for inflation) is where are we in this whole mess?  Is a recession on the way?  Are markets going to crater?  What’s up with interest rates?
 
Let me start by saying if I had all the answers, I would just be managing my own riches.  However, I do believe I have a few cues that might help you understand what has happened and where we might be heading.
​

​Many of you might have heard on the news that the yield curve inverted.  What the heck is this?
 
Simply this is chart where the 10-year treasury bond yield is plotted relative to the 2-year treasury bond interest rate or yield.  When the 10-year yield dips below the rate of the 2-year, the markets are forecasting that longer term growth prospects are weaker than current growth prospects.  This is called a yield curve inversion, as seen below.

All prior recessions have been forecast by a yield curve inversion with 100% accuracy. 
 
Here is the rub though, it is always delayed.  It is not immediate!

​As you can see, the average time to the recession is 21 months.  The markets still advance and gain an average of 15% according to a Credit Suisse report.  So, it is not time to run for the hills and cash out of stocks as the media has led many to believe!
 
Yes, a recession is probably in our future, but business and market cycles do not usually last forever.
 
The good news is that the media and market commentators have be become so negative that there is likely nowhere for the markets to go here but up.  Remember, the markets are said to “fool most of the people most of the time.”  Believe me, I have been the fool many times!
​

​I already discussed yield curve inversions, above, and we learned that that signal alone does not spell the end to stock markets.  In fact, it can mean additional returns over the next 21 months on average.
 
The stock market is still trading in what we call a series of higher highs and higher lows.  This is the definition of an uptrend.
 
In the chart below notice the pattern of green circles is primarily forming higher highs and higher lows.  The only exception was the October through December correction, but that did not last long enough to change the overall trend of the market.

​As much as you may hate the volatility, this market is still trending higher.  In fact, just recently it broke higher from a trading range that many were forecasting was the start of a market that wanted to trend lower.  They were, unfortunate for them, incorrect.

​However not all is well, growth has slowed globally due partly to the trade war between the U.S. and China and partly due to normal business cycles that rise and fall.  This could eventually lead to lower stock markets.
​

​​The slower growth has led Central Banks around the world to reduce the interest rates they charge their member banks, which then makes capital cheaper for consumers and investors.
 
Many of these same Central Banks have reduced rates to negative yields or even re-implemented stock or bond buy back programs (i.e. quantitative easing programs) to simulate growth.
 
I warned our clients in our last quarterly letter that global Central Banks will not ride off into the sunset quietly (for some unknown reason).  They are primed to enter a fight to the death.  A tug-a-war with the economic cycle in an attempt to prop up markets.
 
As an example, Central Banks have delivered 32 interest-rate cuts globally this year as a worsening U.S.-China trade war has dragged down global economic growth.  Even the U.S. Federal Reserve has reduced the interest rate they charge member banks by one-quarter point and are expected to lower rates again in September by another one-quarter point when they meet in a few weeks.
 
So why are rates lower?  The markets tend to lead and attempt to force the hand of Central Banks globally based on the economic and business data available.
 
Here in the U.S. the yield on the ten-year treasury bond has fallen from a high of 3.2% in October of last year to a recent low of 1.47% (see below chart) in an attempt by the markets to forecast slower growth in the future.    In doing so, these lower rates stimulate economic activity and can essentially do the work that it believes the U.S. Fed should be doing.

Great question!  Here is my guess.  It is just a guess as only God knows what is truly happening and he is not talking (at least not to me on this subject).
 
I believe interest rate and quantitative easing programs around the globe are creating a currency war of sorts.  It generally benefits an economy to have a weaker currency.  These programs weaken their currencies relative to other currencies and the lower rates, in theory, stimulate growth.
 
Here in the U.S., our Fed has been resistant to make the same kind of interest rate reductions and engage in the same types of quantitative easing programs as other countries.  This has resulted in a stronger dollar, which has negatively affected our international trade.
 
However, it does draw investors to our treasury bonds as the higher relative rates attract buyers from around the globe.  The strong dollar, however, is a negative from U.S. growth especially for global companies based here in the U.S.
 
I believe eventually the U.S. Fed will have to follow suite as growth here continues to slow.  In Europe, they have negative yielding bonds where the holder pays the ECB for the right to hold that debt.  Why someone would buy such bonds is beyond me, but the bet is on an assured return of capital even if a Euro is returned at something less than a Euro.
 
If I am right, this means interest rates here will continue to head towards zero and maybe even negative yields.  The U.S. Fed has already stopped selling bonds from its portfolio (a form of quantitative tightening) and they will with time reverse course and start buying bonds and maybe equities.
 
This is the tug-a-war I mentioned.  Poor economic data and negative market action will force action by Central Banks, this action will encourage markets and temporary stimulate ever weaker growth. 
 
Volatility will be the result!  Better get some Tums!
 
Ultimately, Central Banks will lose this tug-a-war.  However, that could be years down the road.
 
In the process of losing this battle, global currencies will be debased.  Sovereign nations will be even more indebted as a percentage of their GDP and there will be no way to ever repay all the debt outstanding for most nations.
 
The result, in my opinion, will be some kind of debt reset and the roll-out of some kind of new global currency.
 
The problem, I have no idea the timing!
 
The good news for investors is that I do believe inflation, not deflation will be back with a vengeance at some point.  The only way to survive the inflation will be to have assets that go higher with inflation.  Equities, commodities, real estate and precious metals should do very well.
 
Not necessarily a pretty picture, but that is what I see!
 
Let us know how we can help you achieve your goals while navigating what looks to be a very interesting time in our history!

According to many market watchers, August notched a new milestone for the current bull market.  It marked the longest bull market in terms of days in history as it eclipsed 3,453 days on August 22nd.

Of course, many would argue that this depends on your starting point.  Some would argue that we had a bear market (defined as a correction of greater than 20%) in 2011 and so the end of that correction is the starting point of the current bull run which then greatly shortens this calculation.

From our perspective, who cares!

Let’s ride the bull market as long as it wants to keep moving up.  The longer the better!
When the bull market does finally signal the end, our process will help us move aside or hedge our remaining positions to minimize those losses.

In the early days of my career, I tried to predict market tops and was wrong almost 100% of the time, but not anymore. 

I have no idea!

Oh, I can tell you that we are probably much closer to the end statistically than the beginning!  I would probably even warn you that you need to know where the exit sign is because the average bear market is no picnic!

​Technically, I can probably warn you at the correct time that it appears the market is ready to move lower.  However, I cannot guarantee you that that correction will turn into a bear market and that we have seen a top, except in retrospect.  The last few words here are key here!

​As trend followers, our models are not predictive.  They are reactive.  We will only know a turning point in retrospect and then we react. 

​So how much of a shine would the average bear market take off the average American’s portfolio?  Is this even worth worrying about?

As you can see in First Trust/Morningstar chart above, the average bear market lasts 1.4 years and brings a cumulative loss of -41%.

Let that sink in a bit!

If your current portfolio value is now $425,000 at the end of the average bear market it will be worth just $250,750 at the bottom.  That is quite a hit!

According to First Trust/Morningstar, the average bull market rises 9.1 years and 476%. 

​So how long then does it take to recover this 41% hit ?  The answer is?  It depends!

If we use an average of the annualized bull market returns from the First Trust/Morningstar chart, that would be approximately a 20% annual return, so roughly 2.8 to 3.0 years.

Quite honestly not as long as I had expected and certainly the bull market returns at almost 20% per annum are more than I would have guessed.

However, what if instead of losing 41%, your portfolio value, you only lost 10% (or maybe even made money as we believe we can do with a couple of our portfolio solutions)?

Well happy days!  The recovery period at an annual return of 20% in a bull market assuming a 10% bear market loss is just .6 years.

In our case, I would be shocked if our clients lost 10%.  We believe 5-6% is probably the maximum and that further shortens this recovery period to just .3 years or 3.6 months.

What this means is that our clients are in theory enjoying market profits much faster than the person who just buys and holds through entire market cycles.

The buy and hold investor must wait almost 3 years to get back to break even before they can start earning new returns. 

If fact, this period to break even is usually even longer because the average investor does not usually do as well as the market averages.

According to the Investment Company Institute and Real Investment Advice.com, the average investor underperforms the S&P 500 index by almost 38%.  Assuming that is correct, the recovery period for the average investor now grows to 4.5 years.

Let’s assume we investment just as badly (not likely) and our recovery period on a 10% loss grows from .6 to .96 years (almost 1 full year).

Which scenario would you rather have?  A one-year recovery or a 4.5-year recovery?

​The choice is yours, but if you are like most Americans, it may be time you focus more on that exit door and give us a call!

Written by: Jeff Diercks