Category: Finding Benjamin

May 12, 2022

I keep this on a sticky note on my desk.

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Lizard Brain noun:

The part of the brain to which primitive, nonrational, or self-interested behavior is attributed.

“Your lizard brain thinks the world is ending while your more rational side can see that you’re in no real danger”

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What a great moment and time for a mental check up as recent market declines are setting up another one of those very special buying opportunities.  Will you be emotionally ready to be an investor when you need to be?  It is officially time to banish the Lizard Brain!

Empathy for All Investors

Trust me when I say I feel your pain.  Every professional money manager is also a human.  Those who do not learn how to manage their emotions that go along with market volatility usually don’t last long in our business.  I have learned to read and observe my emotions but work every day not to act on them.  Instead, I rely on evidence, systems and a set of rules that has served us well over many years.  Regardless, I want to acknowledge how hard it is to be an investor of any sort in times like these.  It feels dark, hopeless and everything we read and hear speaks of more evil to come.  We are almost relieved when we see that stocks are ONLY down 1% on the day.  We stop looking at our accounts because we don’t want to see the new lower balances.  We think about all the mistakes we have made or the money we spent frivolously in the last few years.  Why didn’t we save more for this rainy day?  There is also a bit of anger in the mix.  Someone did this to me!  Big guys are screwing the little guys again!  In the end, we want out of this emotional state, we want to eliminate the pain and thus we find ourselves ultimately bowing to the Lizard Brain in some act of capitulation.  Investing successfully over a full cycle of bull and bear market conditions is a challenge.  Anyone who thinks otherwise, hasn’t been doing it for long enough yet.

Data

I am an evidence-based investor, or at least I like to tell myself that.  Evidence can help us through tough emotional situations because it gives us better odds of success, if we are strong enough and have enough conviction to simply follow current trends as they unfold.  I am going to give you a few important data points to consider surrounding the current condition of the US stock market.  My hope is that you can push the Lizard Brain away to some degree.

% of Stocks Trading Above a 200 day Moving Average

This is one of the indicators we monitor to identify intermediate and long-term oversold conditions.  Without boring you with the technical details or God forbid a chart, know that this indicator has fallen to 15 or below only 9 times in the last 35 years.  Today the indicator hit 18 and it’s likely we are going to make history again when it tags 15 or less – this month, this quarter, this year?  Literally, this means that only 15% of all stocks are NOT in bear markets and it takes a lot of price damage and a lot of time for the markets to get to this oversold level.  Needless to say, all 9 times in the past have been the bottom of terrible bear markets, crashes and other Lizard Brain events.  Now if we had an evidence based, high probability opportunity to invest at the bottom of every bear market, wouldn’t that be great!  While there is still some work to go, we are getting to that place and time quickly and you should know that empirically speaking, much of the price damage for this bear market is already behind us!  There will likely be lower lows and a period of base building before prices get up and start a new bull market.  I won’t venture a guess on timing at this point, but we need to be ready when we see that very special headline – “Recession is Here”.

Bullish Sentiment Hit a Multi-Year Low Yesterday

Again, the evidence is piling up that even in the short term, the probabilities favor at least a healthy and shockingly strong rebound rally over the next two months.  Investor sentiment is one of the Lizard Brain indicators that seems to stand the test of time, according to the venerable Jason Goepfert of Sentiment Trader.com.  Jason does outstanding work measuring the spread between “Smart” money and “Dumb” Lizard Brain money.  Smart money gets bullish and aggressive at lows (good) while Dumb money sells at lows (bad).  When the spread gets very wide as it is today, we typically see stocks bounce strongly within a few days.  For what it’s worth, Jason notes that this is the 11^th lowest reading in the Dumb money index since 1998.  Of course, these are the same times and dates as our % of stocks trading above a 200-day moving average, indicator above.

Capitulation Panic Selling This Week

One more big one, perhaps the biggest one, to add to the pile.  When the Lizards start panic selling in volume, we know that fear has turned to action.  When all sellers are done selling, there is a vacuum of sellers, with deep price discounts and only buyers left.  Today, sellers are still selling but they are almost exhausted in their efforts (nothing left to sell, 100% in cash? not worth selling something that is down 92% like Peloton?).  This week, and last, we saw panic selling in volume.  The crypto crowd that talks about HODLing (Holding On for Dear Life) is panic selling.  Those who owned all the high-flying crazy valuation technology stocks, panic sold.  And now we are finally seeing real selling in those safe technology names like Microsoft, Google and Apple as they race to catch up to Netflix, Tesla, Facebook and others already in bear markets.   Bear markets take no prisoners.  For the very aggressive investors who can sift through the wreckage and find good companies with strong revenues that are now trading at book values, there are some diamonds out there.  We bought seven new positions in the New Power strategy today and added to several others that we purchased last week.

Don’t Forget Bonds

Bonds also appear to have found an intermediate term low in the last week which is contrary to what you might expect given all the inflation headlines and the Fed raising interest rates on May 6^th.  Treasury Bonds are now beginning to price in the realities of recession in 2023 as they always do 6-9 months before recession actually arrives.  As you know, we have been (re) building our Treasury Bond position for the last couple of weeks and they are finally responding nicely (up 2-4% this week alone).  Investors have been especially beat up this year since stocks and bonds have both moved in sync (down) as they will until inflation calms down.  But for now, bonds are giving us the green light and offer investors a nice place to be outside of stocks.  Commodities are still behaving well, up again today and yesterday while stocks are down down down.  Diversification is another weapon to help fight the Lizard brain.

So, it is raining Lizards right now, they are crawling on the walls, in your car, on the radio, behind your pillow keeping you up at night.  Banish them, get in the drivers’ seat of your own mind and try to recognize opportunities as they unfold.

I hope you are getting outside, it’s nice out finally!

Cheers

Sam Jones

 

 

 

 

 

 

May 9, 2022

As promised, we will be talking about housing and real estate trends in this update. That discussion will segue towards the one investment approach that continues to shine in this “no where to hide” market environment.

Highlights of the Last Two Updates

I would like to take a second to review, in bullet form, the highlights of the last two posts because I’m hearing some bad interpretations of what I clearly said. I will simply cut and paste select exact words for your review.

Calling All Cars #1 – Red Sky Report May 2nd

• Investors have the opportunity to add to stock or bond allocations, preferably at once. 
• It is our expectation that the stock market will remain under pressure and choppy until midterm elections in November.
• If you are more on the conservative side, there should be other opportunities to add to passive accounts throughout the summer and into the fall of this year. 
• I plan to allocate any new money across all assets held in these investment accounts in order to maintain a desired diversified mix of securities. (The current mix in my kids’ 529 education accounts are 36% stocks and 64% bonds which represents the “conservative growth” strategy suggested by College Invest for students of their age -18 and 20).

This is the confirmation of me adding to my kids’ 529 plan accounts today – 5/9/2022

The Gravity of the Situation – Red Sky Report April 29^th

• Gravity is real and valuations ultimately do matter.
• The condition of the economy is also clearly moving from full recovery to early recession.
• Stage 6 is also the time when we see the most wealth destruction as stocks (all stocks including value) can enter the realm of real bear market losses. (We are entering Stage 6 quickly)
• #1 Start reducing your stock exposure all together
• #2 Consider reducing, but not eliminating, inflation hedges, commodities, and hard assets
• #3 Use the proceeds from #1 and #2 to rebuild your bond position                                                                                                                                                                                                                                           

Hopefully, that is pretty clear advice and might help our clients understand our perspective on the markets and the changes we are making now to accommodate current conditions in our active risk managed strategies. Ok, now on to Housing and Real Estate trends.  

Real Estate Trends 

I’ve changed my mind on real estate. Historically, real estate has done well or at least stayed stable during periods of high inflation. Real estate is after all, a hard asset and hard assets tend to retain their value during inflation. In recent weeks and months, we are starting to see the primary drivers of price gains in real estate reverse course. At this point, I think real estate will follow the path of the US stock market with a 6–9-month lag. Let’s go back in time and review the perfect confluence of four variables that drove real estate prices exponentially higher in the last 36 months.  

Free money – Stimulus from the Federal government following the Covid shut down, put $Trillions into the hands of consumers and artificially increased the US savings rate to over 12% in a very short period.  Let’s go shopping for a new house now that we have a larger down payment! 

Work from Home – Covid also drove workers and students to spend more time in their homes. We need more room! In addition, Covid offered some a chance to relocate to more desirable locations especially as remote work became more permanent in certain industries. YOLO! (You Only Live Once). 

Interest Rates Held at 0.25% for way too long – The Federal Reserve dropped interest rates to near zero on March 16^th of 2020. Mortgages followed and remained artificially low for almost two full years. This was happening even while inflation was ripping higher at 6-8%. Logically, home buyers jumped at the opportunity to bid up homes that were rising at 15-20%/ year in price using borrowed money that was still stuck at 2-3%.  

Supply of Homes for Sale Stuck at Historic Lows – This is a tired story but true, nonetheless. The available stock of homes for sale, compared to the demand for homes in the US, was historically imbalanced for the last two years for a variety of reasons. Mostly, there was a shortage of new construction that dated back to 2018 when rates were actually much higher. COVID shut down building and the availability of building materials for about 18 months even while demand was exploding.  

Now fast forward to today. All four variables have almost completely reversed, and yet home prices are still suspiciously hovering at the highs. As a reminder, I do believe in gravity. Good consumers in the US have done what they always do when provided with cash stimulus payments from the government; They spend it all. The year over year, US saving rate shown below, is now back down to 6% which was the pre-pandemic low from a high of 12%. We smart investors should not expect demand for housing (or anything else) to continue at the current pace now that the savings rate in the US is back to “normal.”   

Interest rates are obviously on the rise now as well putting affordability into reverse. Look at the chart below and understand that even before rates went vertically higher this year, affordability based on mortgage payments has been falling since 2020 as prices for homes rose commensurately. A 30-year fixed mortgage was 3.11% in January of 2022. Now that rate is 5.2%.  

Finally, the supply of homes for sale is likely to rise dramatically between now and next fall.  If all the real estate (single family, multi-unit, commercial) currently under construction are completed over the summer, we will have more supply than any time in modern history.  

Without trying to forecast, and just observing current trends, we can make a logical assumption that real estate prices should fall to reflect a reversal in all of the drivers of recent price gains over the last several years. I’m not smart enough to know how the remote worker thing is going to resolve but that by itself is probably the least influential variable to current housing prices.   

What To Do About Your Real Estate Holdings? 

For most, the answer is do nothing. Your primary residence is your home and not some commodity to be traded. You need to live somewhere, and rents are quickly rising to reflect current housing prices paid. This commentary should not inspire you to sell your primary residence by any stretch. However, from a financial planning perspective, we can and should admit a few things looking forward: 

1. You will be in your current home for a while. The music has stopped, prices will fall, and you should get comfortable where you are – maybe a suitable time to do some DIY home upgrades.
2. If you are overstretched and own more real estate than you want, need, or can afford, you might consider reducing your real estate inventory. Get this done quickly.
3. Rental properties should be held! As I said rents are rising and these properties generate much needed additional income while inflation is chewing away at your earned income or assets. Rentals are GOLD in these environments as long as you do not look at or care about the values of these properties. Keep your long-term goggles firmly in place and work to keep your rentals occupied.
4. Falling real estate prices can have a negative wealth effect. Be aware that if we all feel less wealthy because our homes have seen some price decay, this can impact our other spending behavior and general optimism toward the economy and investing just as it did in 2007-2009. Real estate has become another investment for most, often quoted regularly in net worth conversations. Be aware of your psychology here; best to emotionally unhook from the value of your home if you can.

Investing in High Dividends/ Income  

You have heard me beat the drum on this for a while now. Dividend paying stocks, funds, closed end funds, ETFs, preferred securities, and master limited partnerships are a lot like rental properties. They are currently and historically the inflation fighter of choice, outside of pure inflation hedges. My benchmark for security selection is a minimum of 3-5% in annual dividends. Yes, there are many securities out there paying those annual rates as regular monthly or quarterly dividends. Our job is to identify them and research their continued ability to maintain or grow their dividend payouts to shareholders.  

Our Multi-Asset Income strategy (MASS Income), established near the lows in April of 2020, does exactly that and boasts a 6.2% annual dividend stream across all securities held in the strategy including our current 10% cash position. Comparatively, the rate of inflation is still running above 8% but that number should drop in the months to come as year over year comparisons will become more reasonable. There is compelling evidence to suggest that inflation will stabilize between 4-5% as we get closer to the end of the year which is still more than twice the historic rate of inflation for the last couple decades! 

Dividend payers are naturally those companies with high free cash flow, very little debt on their balance sheets, and are STILL trading at much more attractive valuations than the growth side of the market.  Dividend payers are a big part of the “Value” trade we have spoken of for the last year or two. I’ve heard some recent chatter about valuations becoming more attractive in technology and growth type investments now that prices are down 70-90% from the highs.  Sadly, there is still a long way to go before growth actually becomes attractive relative to Value. Technology for instance still represents over 27% of the S&P 500 as of last Friday where a normal weighting is closer to 16%. Meanwhile dividend payers found in the Energy, Utilities and Consumer staples sectors are still well below their historic weights in the broad market indices. There is a long way to go on the Dividend/ Value trade, perhaps years.  

Performance in the High Dividend ETF space has been excellent YTD in both relative and absolute terms.  

Please fee free to contact us if you are looking for high dividend payers for your own portfolio. We’d be happy to help you with some suggestions after reviewing your situation.  

That’s it for this week, enjoy the spring.  

Sam Jones 

 

 

 

 

 

 

 

 

This is a special update for those who are looking for guidance as to when to add to investment accounts.  Details to follow. 

Calling All Cars! 

We send this notice to our clients and interested parties when we see an opportunity to add to investment accounts when the markets are trading at a discount or have reached a notable oversold extreme.  The strategy in play here is most appropriately applied to accounts where investments are held passively (aka Constant Exposure) with a long-term time horizon.  These accounts might be taxable accounts held by high-income households where trading might generate unwanted short term capital gains.  Other accounts might not allow much trading, like 401k plans, active retirement accounts, 529 education saving accounts, or Health Saving Accounts.  As we mentioned in our last update, the best strategy for any and all passive accounts is to stay diversified and simply to look for lower risk entry points or discounts in the markets and use these opportunities to add to your investment portfolio.  This is not a buy the dip strategy, it is a buy the deep discount, oversold condition strategy.  Now on to the specifics. 

How and when to add to your passive portfolio 

Let me be clear that BOTH stock and bond markets are in deep corrections and selling pressure remains present in both asset classes.  We are faced with a rare environment, due to very high inflation, when stocks and bonds have both sold off substantially in unison.  Therefore, investors have the opportunity to add to stock or bond allocations, preferrably at once.   

This is a time to identify cash or available funds, put them into your investment accounts and begin adding to your passive investments.  There is not a single day or a time to do so but rather a zone and we are in that zone!  It is our expectation that the stock market will remain under pressure and choppy until midterm elections in November.  All things considered, there is certainly an above average risk that the entire global equity markets will be lower in the months to come.   If you are more on the conservative side, there should be other opportunities to add to passive accounts throughout the summer and into the fall of this year.  However, today we know two things.  1.  There is growing evidence that stock and bond prices are trying to find a solid level of support at this level.  And 2.  A discount is a discount.  This is our first zone in the year 2022 when we can logically add to our accounts based on a market that is now trading at a discount (12-20% off the highs for both bonds and stocks).   

I will also offer my personal strategy for adding to my own investment accounts now.  I plan to add approximately 1/3 of my intended annual investment additions within the next week.   I will be adding to my kids 529 plans in the next week, and I will be adding to my constant exposure taxable accounts in the next 72 hours with SOME available cash.   Finally, I plan to allocate any new money across all assets held in these investment accounts in order to maintain a desired diversified mix of securities.  For our clients, you can simply add to any accounts, and we will be responsible for the timing of all investment additions.   I also assume that there will be other opportunities to continue adding to accounts as we move closer to the end of the year so be on the lookout for future Calling All Cars! 

As Will Brennan, our capable CFP, likes to say, “control the things you can control”.    Adding money tactically to your investments when they are down and discounted is highly beneficial to your wealth accumulation and the compounding of your returns.  Don’t let a good crisis go to waste! 

Thanks for reading. 

Sam Jones 

April 29, 2022

April is historically one of the strongest and most dependable months of the year for market returns. Obviously, we are making history in the year 2022. Behind the losses for the month, we also witnessed something that I find very gratifying. We are finally seeing the markets return to a more rational, logical condition in a world where gravity proves to be a real force. Please excuse the victory laps in my commentary below. Clearly now, the economic and market cycle is shifting forward toward recession or Stage 6 (of 6). Asset allocations need to be changed to stay with the trends and follow new leadership avoiding new risks and engaging with new opportunities. For risk managed money, this is a time for action, not complacency. Conversely, passive investors or allocations to constant exposure strategies, should do exactly nothing beyond rebalancing, as prescribed.

The All Season Economic and Market Cycle

I describe this cycle as one for All Seasons because we need to remember that every “season” in the economy and the markets presents new risk AND new opportunities. It is true that there is always a bull market somewhere. Investors unfortunately tend to think that US stocks are the only investment out there. The season for global stocks and bonds is in Winter to stick with the analogy, while commodities have been in a well establish spring and summer mode. For my first victory lap, I will remind all of our readers that I said in our year end update, “2022 could be a year where commodities are the one and only place to be”. Clients know that we have held a double overweight position in commodities, gold, energy, and materials for almost 18 months. It has been a great ride, but all good things must come to an end. This chart provided by Bespoke Institutional – The Bespoke Report 4/22/2022.

Let’s look again at the market and economic cycle pattern so I can show you where we are now and what SHOULD happen next in terms of asset classes and sector strength and weakness. Chart provided by Stock Charts and S&P guide to Sector Rotation.

As shown above, the market cycle shown in orange shows which sectors lead at different stages. Clearly based on sector performance in the last 5-6 months, we know that energy, materials, and consumer staples are the only sectors that are positive YTD. That fact alone tells us that we are near, at or even slightly past a stock “Market Top.”  Meanwhile, the condition of the economy, shown in blue is also clearly moving from full recovery to early recession. Financial markets look ahead of economic conditions which is why the two bell curves are slightly offset with the markets effectively leading the economy by 6-9 months.

Now here is the critical takeaway.

When we see a top in the energy and materials sectors, then we know that the cycle for the stock market in general is also topping out. This event historically happens when the Federal Reserve is aggressively raising interest rates in an effort to curb inflation and the rise in commodities like energy (read gas prices). On Wednesday of next week, the Fed is going to raise rates again by .50% adding to their .25% increase last month. This is not a secret and stocks are now pricing in the reality that the economy is slipping toward recession. Yesterday, the US Gross Domestic Product (GDP) for the first quarter was reported as -1.4% down from +6% last year. Maybe slipping isn’t the right word here.  Looking at the chart above, smart sector investors should now set stops on their energy and materials positions and stick with consumer staples, utilities, and healthcare. Financials are something to invest in closer to the bottom of a recession, so we will start looking there in 2023. Of course, we still want to stay far, far away from technology, consumer discretionary and communication services. As I write, Amazon is plumbing new lows, down 13% today alone. In fact, Apple is now the only stock among the fabled FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google) that is NOT down between 20-70% from the highs. Remember when they said that valuations do not matter anymore because interest rates are so low. I said that was dilutional. Gravity is real and valuations ultimately do matter.  Now, we are finally seeing massive wealth destruction in technology companies that traded at nosebleed valuations as I suggested in 2021 (victory lap #2).

Now let’s talk about asset class (stocks, bonds, commodities, and cash) rotation in the context of cycles and seasons.

Enter the Pring Turner Six Business Cycle Stages!

In 1994, I read Martin Pring’s book, the All Season Investor. It was profound for me to the extent that I renamed our firm, All Season Financial Advisors a few years later. This construct is pretty basic and simplified but it does correlate with the sector cycle chart above nicely.

With perfect hindsight, we know that the economy was between Stage 3 and Stage 4, back in October of 2020. That was the time to “Buy inflation sensitive” stuff (like energy, commodities, materials, etc.). We did so aggressively for our client accounts. It was also a time to sell bonds aggressively as indicated above. Stocks could be held then as long as one was selective and leaning toward value, dividend payers and high cash flow companies. You’re all probably tired of hearing me harp about Value over Growth trades but it’s been a winner obviously (Victory lap #3).

Most of 2021 fell into a Stage 5 environment (Stocks Ok, Inflation Sensitives Strong, Bonds weak). And 2022 is quickly moving toward Stage 6. Let me spend a bit of ink on this stage.

Stage 6 is short, thankfully. Stage 6 is also the time when we see the most wealth destruction as stocks (all stocks including value) can enter the realm of real bear market losses. Stage 6 also sees a top in commodities and inflation hedges as the economy slips toward recession and inflation recedes. We’re still early here and inflation is not done, nor are we formally in recession yet.  But that is the NEXT thing to happen from a cycle standpoint. Can we skip stage 6? Can the Fed orchestrate a soft landing and avoid a deep or lasting recession?  We will see.  So, dear investors, we are approaching a rather serious time and place where we need to begin making asset allocation changes to our portfolios. Please note, this advice is only appropriate for portfolios that are intentionally dynamic, risk managed and preferably tax deferred (to avoid unwanted taxes associated with trading). These changes are as follows:

1. Start reducing your stock exposure all together if you have not already done so. During stage 6, all stocks washout, the good and the bad.
2. Consider reducing, but not eliminating, inflation hedges, commodities, and hard assets.
3. Use the proceeds from #1 and #2 to rebuild your bond position. These can be intermediate or long-term Treasury bonds, investment grade corporate bonds and municipal bonds (for taxable accounts).

Our flagship All Season strategy has the following asset allocation for reference as of today.

Global Stock Indexes – 60%

47% domestic stock ETFs, mostly dividend payers and value – reduced!

17% international stock ETFs, mostly emerging markets, Canada, and Mexico  – New!

Alternatives/Inflation Hedges – 21%

9% Commodities – reduced!

8% Gold – hold

4% Real estate – reduced!

Bonds/ Income – 19%

5% Long Term Treasuries – New!

5% investment grade corporate bonds – New!

6% Specialty Income – New!

3% cash

Constant Exposure Approach during Stage 6

As you know, we have a growing number of client assets invested in our “Constant Exposure” strategies. These are formally our Wealth Beacon and Custom Direct Index strategies. The obvious concern for any who are invested in more passive models during a stage 6 environment is that your account balance will fall. That is 100% true. But the strategy of investing with constant exposure is not to attempt to sidestep risk and loss but rather to find great moments to add to these strategies. Stage 6 presents constant exposure investors with that opportunity. We are not there yet. Our goal with any passively invested money (529 plans, 401k plans, constant exposure models) is to buy low, that’s it. We do not attempt to sell high or do sector rotation or move a lot of money between asset classes as described above. We build our asset allocation models to include mostly stocks and bonds, we remain disciplined in keeping our portfolio balanced and we patiently work to find that time and place when we can add to our portfolios. This is the simplest, most effective, and most productive way to manage your money assuming you have the tolerance for this approach.

So, for all investors who have money committed to Constant Exposure, I will offer some simple advice. Pile up your cash, be patient and know that your day to deploy at deep discounts is coming. You will make greater after-tax returns than any other approach if you remain disciplined over time. What you cannot do is sell out at the lows in an emotional act of sudden risk aversion. Selling at the lows destroys the entire process of accumulating wealth, adds tax liability, and forces you to buy back often at much higher prices. There is merit in the constant exposure approach if done correctly with discipline. We are here to help guide you through this process and work through the emotions that come along with it.

Next update, we’ll be talking about real estate.  There is much going on here and given the fact that so much wealth in our country is tied up in real estate, it will be worth your time.

Have a great week! Mud season up here in Steamboat Springs (not my favorite).

Cheers

Sam Jones

 

As always, stock markets experience corrections, some even turn into bear markets.  As we say in our Guiding Principles on our website splash page, “Risk Management Is Critical To Your Success”.  For this timely update, I’m going to do a deeper dive into the specifics of how, and to what degree, our various investment strategies do Risk Management, and we’ll finish with an action item for opportunistic investors.

The Purpose of Money

Importantly, all investors must remain focused on the primary goal and purpose of our money and that is to serve us in finding financial independence, covering our living expenses in retirement, and avoiding the risk of outliving our assets.  As I’ve said in recent updates, I’ve seen a lot of bad behavior in market participants in the last 24 months angling toward get rich quick or entertainment and stock market gambling.  We want our money to be boring.  We don’t want drama.  We want to fall asleep watching our investment balances rise consistently over time.  Entertainment is easy to find at Netflix, Vegas, Sports, etc. Let’s all commit to having our money serve its true purpose and leave entertainment out of the equation.

Markets Continue Deep Correction

Certainly, a large swath of the financial market is already in a bear market defined as losses of 20% of more.  Ask Cathy Wood, the know-it-all investor in all things “entertaining”.  The Ark Funds are down over 60% since February of 2021 (not 2022) and falling 2-3% a day.  But her funds are actually a nice representation of what’s been happening to a lot of investor capital in the last year or so.  Fun fact, only 25% of all stocks in the NYSE are trading above a 200-day moving average as of yesterday.  That number will be quite a bit smaller after today.  The “200 day moving average” is a long-term trend indicator that effectively shows whether a stock, index or sector is in a bull market (above a rising 200 day) or in a bear market (below a falling 200 day).  Said another way, even though the mighty S&P 500 is only down 11% YTD, over 75% of the market has already been in a heavy bear market experiencing losses of 20% or more.  To be clear, while painful looking backwards, this creates an enormous opportunity looking forward.  Who wouldn’t want to buy the bottom of a bear market?  Well, there are a lot of things in deep bear markets now!

I don’t know when or where this correction ends.  We do know that risk controls should be firmly in place for investment dollars that are dedicated to managing risk.  In the short term, the markets are marginally oversold and sitting at a place and time where we might expect a bounce in prices.  However, the vast majority of our intermediate and longer-term indicators suggest that there is still significant downside risk, and the burden of proof lies with the bulls.  So, let’s get into how, where and to what degree, we manage market risk in our various strategies.

Risk Controls in Our Strategies

Understand that among our 11 different programs, we have two primary types of investment strategies in our firm’s offering.  We have dynamic, actively traded strategies and we have constant exposure strategies that adopt a more passive approach.  All are “risk managed” in their own rights so let’s dive into those distinctions.

Active Strategies (All Season, both Income models, Gain Keeper Annuity, Worldwide Sectors and New Power)

These strategies are best suited for tax deferred accounts where trading does not generate excessive short term capital gains.  We have been working with our clients in high tax brackets for the last two years to move any taxable accounts into more tax efficient programs.  Active strategies have the capacity to orient your investments incrementally and methodically into leading asset classes and securities while avoiding things that are unattractive for any number of reasons.  As regular readers know, we have carried an absurdly large inflation hedge position in our All Season strategy by owning gold (IAU), silver (SLV), metals and mining (PICK), agriculture (RJA), commodities (PDBC) and energy (AMLP).  All these securities are up strongly this year, several approaching double digit gains in a market that is now down double digits.  In sympathy, we have carried a very small position in bonds for over 18 months.  Bonds tend to do poorly, as they have, during inflationary cycles.  Our stock positions have been relatively underweight and focused on value, select internationals and high dividend payers.  Further, we have a volatility control allocation to securities that have very little correlation to the movements of the broad US stock market.  Some of these are short positions that actually make money on down days.   At the end of the day, our All Season strategy is barely down on the year net of fees.   All Season and our Gain Keeper Annuity strategy have very similar approaches to dynamically shifting investment dollars among assets classes.  Both strategies have very similar results YTD.

Other active strategies that are committed to stocks only like Worldwide Sectors and New Power, manage risk through selection criteria.  Here we are working daily to invest in securities that have attractive valuations, are in the right sectors of the market and trending higher in price.  That’s a tall order given the volatility in the markets.  Naturally with any stock only program, one would expect higher volatility, but the risk adjusted returns here are far higher than the alternative of simply owning the whole market through any stock market index or ETF.  Risk adjusted returns means returns are generated with much lower risk and volatility than our respective strategy benchmarks.  For those who want to own stocks and do so with less risk of permanent downside losses, these strategies are great alternatives.

Finally, our Income strategies are also dynamic and actively managed for downside risk.  Here we work only with bonds and income bearing securities as our universe of investible options.  But we do have a great deal of choice.  We can own Treasury bonds, which have been extremely unattractive for the last 18 months or we can swing all the way out to High yield corporate bonds which tend to act more like stocks.  In the last year, sadly, the entire spectrum of bonds and income investments have been in downtrends.  In these situations, we tend to just patiently wait in cash.  Income strategy investors might have noticed a 40-50% cash position for most of the last year.  Cash is a choice.  Cash is an investment.  Right now, we choose cash and are glad for it.  But soon, possibly very soon, we will begin to deploy our cash as the set up for new buys is becoming more attractive by the day.

To be clear, risk management is not risk avoidance.  None of our strategies eliminate risk.  To do so would literally eliminate return.  Our job is to actively orient assets into things that show better risk/ reward properties and have favorable price trends.  We do accept some volatility along the way, but our downside losses should remain shallow, manageable, and recoverable within several months as they are today.

Constant Exposure Strategies (MASS Income, Wealth Beacon and Direct Indexing)

Constant Exposure is a nice word for a Passive investing style.  Nothing is really passive as in held forever, so Constant Exposure is really a more accurate way to describe what we do.  The idea here is that for accounts where trading securities might generate unwanted tax liability, we want to own securities for longer periods of time (in excess of 12 months) in order to generate long term capital gains.  Even better, we might hold securities for years and push out any tax bills into future years.  Gains are only taxed when securities are sold for a profit, remember.

Constant exposure strategies are intentionally designed to “Expose” assets to the full benefits of the stock market which does factually tend to rise over time.  Market corrections, even bear markets are opportunities to act for these strategies.  We can sell securities that are held at a loss, capture the loss as a tax credit and replace those securities with new positions – keeping our exposure “constant”.  We can also use market corrections to rebalance our holdings.  For instance, bonds have become a smaller part of our constant exposure strategies in recent months which the stock side has increased substantially.  Now, as stocks are selling off, we can potentially rebalance our portfolios by adding to bond positions and bringing stock allocations back to their prescribed weightings.  Market corrections also provide investors an opportunity to add to their constant exposure strategies just as any of us would take advantage of a desirable item that is suddenly on sale!

Our Multi-Asset Income strategy (MASS Income) is a bit of a hybrid approach that I find very attractive in the world of passive constant exposure approaches.  Here we focus assets on high dividend and income generating securities across multiple types of securities (stocks, stock funds, closed end funds, REITS, preferred securities, mortgage bonds, credit bonds, etc.).  The goal of this strategy is to remain invested (Constant Exposure) and generate a total yield of 6-7% annually.  Price patterns and preservation of principle during market declines is a secondary consideration while we remain focused on the durability of the monthly and quarterly income distributions instead.  Investment capital is the means of generating income and we need to stay invested in order to keep those checks coming!  Think of it like a rental property.  We always want to keep that property occupied with tenants who pay rent.  This is very much the same approach using public securities while avoiding the time and energy of taxes, tenants, and broken toilets.

Of course, constant exposure strategies are going to realize the full upside potential of the market and the full downside potential so it’s critically important to make sure your allocations to these types of strategies is within your personal risk tolerance and capacity.   Risk management is therefore light in these strategies and investors should not expect much principal protection.

Magic is in the Right Mix

One of our primary jobs as your advisors is to create the right mix of strategies for your situation within our offering.  It is absolutely appropriate for most of our clients to have multiple strategies in play with representation from both Active and Constant Exposure camps.  In times like these, active strategies do a great job of preserving capital and limiting losses.  In raging bull markets, the constant exposure side of the mix carries the performance torch.  When executed properly, the whole portfolio yields the desired results in risk control, tax efficiency, income generation and growth.  THAT is when the magic happens, and your assets work to serve their real purpose in your life.

 Short Term Opportunity – Calling All Cars!

There is a developing opportunity to add cash to the financial markets.  The entire stock market is trading down in double digits now and the growth side of the market is down in excess of 40% or more in a lot of cases.  Internally, speaking as the manager of most of our company assets, we are looking to get aggressive with our allocations and remove defensive positions (hedges and other securities) as prices continue to fall.  We are looking for some indication that selling pressure is declining and that buyers are willing to step up.  So far, we see nothing constructive, including today which has seen mushy, selective rebound following news of Russia’s invasion of the Ukraine.  Lower lows and perhaps a few more uncomfortable red days (or weeks) could push this market into a deeply oversold condition that would be attractive.  Regardless, this is A TIME AND PLACE, to consider adding new money to investment accounts.

Regular readers know that we issue a notice called Calling All Cars as an instruction to identify cash, move it in to investment accounts and start a shopping list of potential buys.  This is that time!  I will be doing the same for my personal accounts, planning to add to retirement accounts, kids 529 plans, and potentially starting a new direct indexing strategy on our new Canvas platform (happy to provide more details upon request).

It is time to act if you have sideline cash that you are interested in investing.  Any new buys done on a DIY should be made judiciously and with good empirical evidence.  There is never a day to sell all or buy everything.

That’s it for now, hoping to help you understand a bit more about how and to what degree we manage the risk in our clients’ portfolios.

Sam Jones

 

I was 32 years old in the year 2000, when I was invited to participate in the Denver Post Investment Roundtable talk alongside some industry heavy weights who had a lot more experience than me.  I was nervous.  This was the first time I had been recognized as an expert in anything having started in the business only 5 years earlier.  After a two-hour long passionate and heated debate, I realized I was the only participant in the room voicing grave concerns about the overvalued condition of technology and the pile of new internet stocks. The elevator ride down from the meeting room was a bit like a cage match.  The grey beards turned on me in a unified voice and said,  

“You will not survive in this business if you say bearish things in public!”. 

I think they were trying to provide some constructive career advice.  It was a pivotal moment for me realizing that the old guard and the public really don’t want to believe or hear, that today’s (yesterday’s) big winners could fail or that returns might stop.  I also understood clearly that the financial industry has a vested interest in feeding the machine of bullishness in order to keep investor money flowing, even in the face of damning evidence to the contrary.   

3 months later, the technology heavy Nasdaq peaked and fell 80%+ over the next three years.  I got lucky.  We made a positive return in each of the next three years for our clients by simply investing in other areas of the market that were still very attractive including value, bonds, and small caps.   

On January 6th, 2022, I posted a very clear update regarding “What’s Next”.  I almost felt like that 32-year-old kid again saying the same words about the ridiculous valuations in mega cap technology and the top-heavy nature of the financial markets.   Several readers suggested I am too bearish and negative.  I’m having Déjà vu.  

To be clear for all of my regular readers; I am rarely if ever bullish or bearish on “the market” as a whole.  After all, there is always a bull market somewhere!  It’s a bit like food for me.  I like food, I eat it regularly.  But sometimes I want to eat meat, other times I like to eat vegetables.  Sometimes both!  Putting your entire financial world in one food group or another is just about as silly as that sounds.  My unapologetic promise to all.   

I will always call it like I see it, with honesty and integrity. 

I will point to evidence regarding risk and opportunity before offering my opinion.   

The only thing I will remain bullish about is our value as a steward and manager of our client’s wealth in all market conditions. 

Still Bullish on the Big Three Themes 

For the last two years, we have been guiding toward significant opportunities in three areas of the market.  These are working, unlike a lot of things in the market now.  These are, and will, continue to be the focus of our actively managed strategies for our clients.  But there are some subtle changes taking place in each.  The Big Three are STILL as follows. 

• Value  
• Emerging Markets 
• Commodities/ Inflation

Value Over Growth

Value has been outperforming growth since… November of 2020.  There was a slight pause in this relative relationship last summer, but it wasn’t enough to change leadership.  We remain dedicated to the value trade in all senses.  Value companies are those who have high free cash flows, low debt, pay dividends and tend to occupy the cyclical side of the market like energy, industrials, transportation, materials, banking, and infrastructure.  These tend to do well when GDP is growing (now 7%).  These companies are making new highs regularly even during January’s sell off. 

Nothing really subtle about it.  Own Value and stick with it.  Likewise, we are avoiding growth companies as they remain out of favor, overpriced, over-hyped and trending lower in price in a meaningful way.   

Emerging Markets 

This Big opportunity didn’t work well in 2021.  In fact, the opportunity didn’t happen at all, and emerging markets actually showed a minor loss for the year (-0.61%).   China makes up a large portion of the “emerging” market and China experienced some politically self – imposed destruction of wealth.  Chinese mega cap technology companies like Alibaba, Tencent and Bidu were down almost 50% in 2021 as a group.  However, like so many things this year, last year’s losers are becoming this year’s winners.  I’m not ready to say that Chinese stocks have turned higher but they have stopped falling and that by itself is noteworthy.  If the Chinese market can turn higher, we’ll see an explosive move in any of the broad-based emerging market funds.  Latin America on the other hand is already booming, led by resource intensive countries like Peru (+9.7% YTD), Chile (+11.2% YTD) and Brazil (+9.8% YTD).  We have initiated positions in emerging market stock and bond funds that are heavy in Latin America and intend to add to them in the weeks to come.  Would you believe that Brazilian bonds are paying almost 12% in annual interest?  

“How much is a Brazilian anyway?”  George W. Bush 

 

If you’re looking for a cheap (deeply discounted) side to the financial markets, stay focused on Emerging Markets.   

Commodities/ Inflation 

I’m really struggling to not say “I told you so”.  Commodities continue to move higher in price to all-time new highs in the face of a sharply falling US stock market.  This is the only source of diversification in any asset allocation portfolio and will remain so for the foreseeable future. Bonds have stopped falling but are still positively correlated to stocks.  That means that bonds are no longer serving their purpose in providing ballast or stability to a stock portfolio.  Commodities, however, are doing exactly that.  There are subtle changes emerging in this space that might require some adjusting of your commodity exposure.  Crude Oil may be approaching the upper end of it’s historic price range in the upper $80’s.  Yes, it could go to $100+ easily but this would likely to be an outside and an exhaustive move (good place to lighten up on oil and gas if you own them).  Oil and gas still dominate most broad-based commodity funds and ETFs by weighting, so there will be a time and place to reduce exposure to commodity funds soon.  At the same time, we’re seeing some amazing opportunities in metals and miners both in gold, silver, platinum, palladium, even uranium.  We are likely to shift assets from broad based commodities funds and into more specific metal’s investments in the days and weeks to come.  Agriculture and food commodities are up, up and away. As a firm, we took a stand with commodities in September of 2020, adding to those positions in early 2021. Our allocation to commodities in our dynamic asset allocation strategies like All Season remains firmly at 25-30%. Commodities and hard assets will continue to rise in value for as long as inflation is with us. Now I’ve heard a lot of talk about the end of inflation in 2022. I will leave you with one chart.  Look on the right side and I want you to ask yourself if the recent move in PCE (Personal Consumption Expenditures), the Federal Reserves’ favorite measure of inflation, looks like the beginning or the end of inflation. I know my answer. 

 

There are a lot of things to be excited about in this market.  There are also a lot of new risks. Our job as investors is to allocate our money properly in sync with the current economic and financial environment. As usual we are handling all of this for our clients so you can focus on the things YOU can control. 

Happy February! 

Cheers 

Sam Jones  

 

 

 

As many of you know, my wife and I have a four-month-old son at home. Today was a big day in our house—our little guy rolled over from his stomach to his back for the very first time. Yesterday he couldn’t, today he could, what an incredible development! In the next year we are certain to experience a number of these milestones—eating solid food, crawling, talking, walking. Each one will happen suddenly and, in some cases, without advanced notice. The changes he’s experiencing will be, exciting, happen rapidly, and be easily observable.

Contrast this with the adult world around us. Our environment, our economy, our lives, our careers, our relationships, our viewpoints.  For most, these things grow or develop (sometimes devolve) from day to day, week to week, month to month, year to year with the changes remaining mostly hidden or unnoticed. The instant gratification, what-have-you-done-for-me-lately bent to our lives leads most of us to miss the small, incremental changes that will undoubtedly shape our futures in positive ways. Only when we inject time and look backwards can we realize the profound impact an innovation or new way of thinking has had on our lives. Hello, iPhone.

In the investing world, when you buy one share of Alphabet (Google) stock, you are inherently relying on the company’s almost 140,000 employees (crazy big number right?) to steward its existing business lines and to create new products and services that will ultimately generate revenue and in turn, earnings, in the future.  How successful will Google’s employees be in this endeavor relative to the employees of other companies? Hard to say, but they are sure to try. In the process the company will grow and change at a glacial pace (at least from the outside looking in) while you and I continue to interact with the company’s browser, search engine and ads and track its stock price on a daily basis.

As of this writing, Alphabet’s stock (GOOGL) is down a hair over 10% in the first three weeks of 2022. I guess they should pack it up, call it a day and close up shop, right? What changed in the first 14 trading days of the year? Did someone pull the plug on the Google machine on December 31 as they left the building in a post-resignation blaze of glory? Hardly. Did something happen in the world that instantly made Alphabet a less valuable company? Is inflation or the prospect of interest rate hikes going to diminish the company’s ability to continue to grow its assets, revenue, and earnings in the successful manner they have in the past? Anyone’s guess. In any event, 140,000 employees are going to go to work today to try their hardest to deliver incremental value to you, the shareholder.

And Alphabet is only one company! Think about it this way: there are hundreds of millions of employees across the globe representing thousands of public companies and working for their stakeholders in the exact same way. And that doesn’t even begin to scratch the surface of private companies!

Weeks like the last one are not fun for anyone. Watching stocks (Alphabet included) sell off across the globe leaves most investors with a feeling of hopelessness and the sense that we are not in control of our respective financial destinies. Weeks like last are the reason why we work with you to build financial plans—to help refocus on the pieces of your financial lives that you ultimately control.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I hate to break it to you, but watching your portfolio decline never gets easier. Market volatility is a feature of our markets, not a flaw, and there will always be reasons to sell. The instant gratification of taking action today might feel good in the short term, but can have a major impact on your retirement as you  give up on the seemingly small, glacial developments that are sure to drive returns in the future.

 

 

 

 

 

 

 

Source: Michael Batnick, The Irrelevant Investor

Having said that, if market movements over the last week have you feeling concerned or nervous or reconsidering the purpose of risk in your portfolio, now is a great time for us to get together to review (or build) your financial plan.

In closing, I want to share a quote Morgan Housel’s Psychology of Money: “Optimism is a belief that the odds of a good outcome are in your favor over time, even when there will be setbacks along the way…The short short sting of pessimism prevails while the powerful pull of optimism goes unnoticed.”

As we move forward in 2022 and beyond I know that there will be successes and setbacks in each and every one of our lives. The magnitude and rate of change in my son’s life will slow over time as he ages. There will be elections, market corrections, wars, inflation, diseases, recessions, deflation, politicians we don’t like and many other maladies. Despite how scary some of these things seem, I am optimistic that we can work together to build a plan that will help you and your family weather any and all storms that come ashore.

Will Brennan

 

 

Every new year, I find some quiet time and space to just think, observe and research the current condition of all things financial.  My intention with these personal sessions is to shed my emotions and assumptions from the recent past and just observe what “IS”.  Often, I find that I’ve gotten caught up in the moment, especially when it comes to making investments or financial decisions.  At the top of my notes page, I write “What’s Next” forcing myself to move beyond the moment and establish some guides for financial decision making in the year ahead.  Please enjoy my notes for this 2022 New Year update.

Notable Quotes 

“Success is 50% luck, 50% timing and the rest is your talent” – Scott Galloway (Pivot Podcast) 

But 

“Luck is the residue of design and hard work” – Branch Rickey 

And 

“Trust is the union of intelligence and integrity” – my Yogi Tea bag 

So 

Please trust my thoughts below and know that I have no specific talent beyond a keen sense of observation and 30 years of experience.  Hopefully we’ll all be lucky enough to make smart decisions when the timing is right in the days ahead. 

 Thoughts on Stocks 

Stocks across the globe should begin adjusting to a reversal, and eventual removal, of central bank monetary support.  In simple terms, here in the US, that means, the Fed is now embarking on their long overdue process of removing liquidity from the markets in hopes of containing very high and persistent inflation.  Given current valuations and the new shift in monetary policies globally, my expectation is that broad market stock indices will generate below average returns for the next 1-3 years with above average volatility.  Earnings per share in the US stock market in aggregate since 2015, are running 209% above actual profits due to share buybacks (companies buying their own stock to boost earnings in the absence of real profits).  And corporate profit margins are just starting to compress now as input costs are moving strongly higher.  Speculation is rampant (SPACs, NFTs, IPO wave of companies with zero income, etc.).  Finally, way too much money is still concentrated in just a few mega cap technology names making this a top-heavy market.  Market indices will go the way of Mega cap tech for the foreseeable future until Mega cap tech no longer carries such a high weighting in the index – specifically the S&P 500. 

I know that doesn’t sound great but at the same time….. 

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Stock pickers and value investors still have an opportunity to perform very well with outsized positive returns in the next few years. 

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Roughly 40% of the current market of US stocks are already very deeply discounted, trading at 12-year lows, spinning off high dividends and just now turning up in price.  Stock pickers and value investors still have an opportunity to perform very well with outsized positive returns in the next few years.   

The market and economic cycle guys that I respect are ALL pointing to the end of 2023 as the next significant low in equity markets and potential best zone to load up on stocks again.  Seems pretty plausible actually.  Between now and then, risk management and selectivity among one’s personal assets, is going to be critical. 

Thoughts on Bonds 

Bonds are unattractive now but could be worth a trade in the second half of 2022, especially long-term bonds.  For as long as the Federal reserve is posturing to fight inflation with the potential to hike rates, bonds won’t provide positive returns.  Allocations to bonds should be kept to a minimum until inflation ultimately drives the economy into recession – later in 2022 or 2023.   

Investors should NOT depend on bonds to provide much diversification benefit until inflation finally tops out – again, maybe second half of 2022.  This condition has been the case since early 2020, no change for now. 

Thoughts on Commodities  

Commodities and commodity producers are behaving well, as we would expect.  They are rising consistently with the constraints in raw materials and high demand.  They are making new highs regularly and now energy is back on board this train after consolidating prices for the last 6 months.  Commodities, including gold at these levels, are now one of the only true sources of portfolio diversification as bonds are no longer serving this purpose.  However, we all need to accept that commodities have much higher volatility than bonds.  Therefore, investors who want lower portfolio volatility in general are going to have to get more comfortable carrying higher cash or investing in securities (funds) that are explicitly designed to control volatility. 

Commodities, as an asset class, are historically under-owned by institutions and retail investors alike.  Valuations are still very attractive relative to stocks and bonds, and I would expect the commodity bull market that began in the Fall of 2020 to continue for longer than most would consider reasonable.  As a new secular bull market in commodities unfolds, it will take several more years of growth and higher prices to attract a representative amount of investor capital.   If inflation goes away in 2022 (not my expectation), then the commodity bull market will end quickly. 

Thoughts on Real Estate 

It’s hard to have any conversation with anyone about real estate without using the word “crazy”.  Indeed.  It is what it is – crazy.  A reasonable person should expect prices to stop moving higher from here.  A reasonable person could also make the case that prices don’t need to fall much considering demand, supply and affordability based on still rock-bottom mortgage rates.  So, we can make a reasonable assumption that real estate prices are probably going to be flat at best for the next several years.  Timing is everything and you must have some pretty evidence-based arguments to convince me to buy real estate now.    Strangely, I’m still seeing people load up on real estate as if it’s a good deal, as if they had better get in now before prices go even higher.  I think that’s foolish, wishful and backward thinking.  I said the same thing back in 2019 before the Covid induced gold rush in real estate.  Nothing has changed in my mind.  Real estate prices will follow the direction of the stock market just as they did in 2008.  They are now partners in the Wealth Effect game. 

Like stocks, there are still some pockets of opportunity.  Income generating rental and commercial properties could be attractive IF you can buy them at a reasonable price (tough!) and can generate positive free cash flow. Rents are going up and will continue to go up for at least the next 8 months to match prices paid for real estate.  Given that OER (Owners Equivalent Rent) accounts for 39% of Core CPI (consumer price index), it’s pretty safe to say that higher rents are going to push core inflation higher well into 2022. 

On the other hand, office property could easily be the source of a nationwide problem.  Let me explain.  We as a country are not going to return to commuting, paying for transportation and parking, just to sit in a cube farm in an 85 story “office” building.  Apple has lost almost 20% of it’s engineering talent to Meta in the last 6 months following Apple’s back-to-the-office mandate.  They say it costs $28,000 per employee to provide office space.  Companies are more than willing to jettison this expense.  This is a structural, seismic shift in how we work that is never going back to the way it was.  How many millions of square feet of office space are collecting dust right now?  How many owners of office property know that once the current lease expires, there will be no tenant to replace those who have left?  What will our cities look like in the absence of “office workers”?  How will we find a mate outside of the office? (1 in 3 marriages come from office introductions).  Big changes are coming. 

Anecdotally, we are in the permit process to convert the second floor of our Denver Office building into a fun residential loft for personal use or short-term rental.  The downstairs will remain as a conference room for meetings with clients.  Mixed use will become all the rage.  If I ran the zoo, I would consider converting many office buildings into residential apartments and condos asap.  

Thoughts on Labor 

This issue is one for the textbooks.  Talk about unintended consequences.  Our labor shortage problem is not a short-term phenomenon either.  Labor participation rates (meaning among the total number of eligible working population, what percentage are employed?), are still stuck hovering close to the historic lows set in March of 2020.  Quit rates (the number of employed who have recently quit) are also on a parabolic rise consistent with the parabolic rise in job openings.   

 

 

 

 

 

 

 

 

 

What’s going on?  I observe a generation of baby boomers who are choosing to retire earlier than expected.  Make no mistake, monetary and fiscal stimulus always finds its way into the hands of asset owners and the Baby boomers are the current owners of assets in bulk.  With a big thanks to the Fed, they can now retire early!  Gen Xers and Millennials are not ready, willing or able to fill those empty seats.  In addition, burn out, health concerns, needs to cover childcare, and interest in starting a new company are all contributing to The Great Resignation thing.  I don’t know where this trend goes from here honestly.  What I do know is that wages are not going to revert to the sub-standard levels of pre-Covid, in the foreseeable future.   Higher wages and salaries that match the real cost of living are now the new standard.  Why is this relevant?  It comes back to the argument of why inflation is not transitory.  The economy and earnings will adjust to a permanently higher wage base putting a new higher floor on costs of goods and services.  As I like to tell friends; We have moved beyond a system that provides what you want, when you want, at the price you want.  Now, you’re lucky if you get to choose one.  Decisions of when to buy, when to build, whether to buy or repair, will become more important than in the past.   

Thoughts on Control 

I see a lot of bad behavior out there these days.  Too many newer investors chasing things they don’t understand, trying to get rich quick, concentrating assets in just a few of last years’ winning stocks.  For all the market talk and attention, I want to remind everyone that the most impactful thing you can do to Create and Defend Your Wealth is to focus on your own spending and saving patterns.  These are the areas where you have control, rather than the markets where you have little to no control and have a relatively low probability of getting rich quick with some great idea or another.  We hear only the stories of that women who is buying a $200M beach house with her recent winnings in Ethereum.  But we don’t hear about the other 99.9% of crypto investors and Meme stock traders who are sitting on massive losses, reluctant to sell and admit error.  We work hard to help our clients understand the purpose of money and to what degree they need to generate returns to cover their real living expenses net of incomes.  Pay close attention to how your taxable money is invested such that it doesn’t generate a lot of short-term capital gains.  Pay attention to your asset allocation mix making sure that you have an adequate amount of cash to cover any expense shortfalls in your house for the next 1-2 years, so you are not forced to sell stock holdings at a bad time.  Consider using a free spending and budgeting app like Mint.com or YNAB.com (You need a budget) for a few months to discover where you are really spending your money.  You might be surprised!  Are you putting money into a 529 plan for your kids’ education and saving on State income taxes?  How about funding your Health Savings Account for $8300 this year as a deduction against Federal Income tax?  Can you really afford a second home?  Is this the right time for a kitchen remodel?  How can you make sure that your income is stable and growing for the next 5,7 or 10 years?  

These are the things I wish more people would focus on.  Those who do tend to worry less and find true financial independence much earlier than the gamblers out there.  Focus on the things you can control, and your wealth will follow!  Yes, it’s messy, but that’s why we’re in business.   

Best to all in the new year. 

Sam Jones  

 

 

 

 

 

 

There is a sickness in the market that is becoming more evident by the day.  The relentless selling since mid-November has come as a surprise to many.  We all look at our investments with a raised eyebrow and more questions than answers.  For this update, I’m going to try to clarify what we see happening in the context of some very notable and recent changes in leadership in the markets.  This may prove to be one of the most important moments in recent history for those wishing to (re)position themselves appropriately for 2022.    

What is Going On? 

Well to put it bluntly, what’s happening in the markets today is nothing that any veteran of a full market cycle hasn’t seen before.  Personally, I’m a little surprised to see it manifest right now given all the current data but quite often the most persistent and lasting trend changes in the markets happen when no one expects them to occur.  What trend changes am I talking about? 

At a very high level, the market is now adjusting to the fact that the Federal Reserve is beginning their long overdue process of removing liquidity from the markets.  Nothing much has happened yet and is not likely to happen anytime soon in terms of the Fed Raising interest rates, but they are starting the process of becoming less accommodative to the markets.  Why?  Well because they now understand clearly that inflation is not transitory beyond a mild loosening of supply chain restrictions in 2022.  They are feeling pressure to “do something!!” knowing quite well that raising rates won’t do anything to curb this form of inflation.  In fact, any action on their part to remove liquidity is likely to increase inflation as the rising cost of borrowing will be added to the pile of higher input costs.  So, they reach into their box of tricks and begin tapering bond purchases as well as pursuing reverse REPOs with their banking partners to create the perception that they will control inflation.   

As a result, we’re seeing the economic cycle clock turn quickly toward full recovery/ early recession environment.   

Let’s take a minute to review what that means from a leadership standpoint in order to help us understand where we should be cutting exposure and where we might add exposure in our investment portfolios.  The chart and illustration below are provided by Stockcharts.com 

Look to the right side two columns marked as Full Recovery and Early Recession.  Right now, I would peg our current environment as closest to Full Recovery mode.  

Consumer Expectations Declining… check 

Industrial Production Flat…. check 

Interest rates Rising Rapidly…. check (but may be “peaking”) 

Yield Curve Flattening Out…. Check 

Looking above to the chart, in a Full Recovery environment, we should expect the following: 

1. The stock market should be topping out broadly with continued leadership in energy, materials, consumer staples, utilities, healthcare and financials.  This is a time when investors must be very selective about what they own and keep risk management protocols firmly in place.  The worst performers should be technology, consumer discretionary, and communication services sectors from here forward. 
2. During this time commodities can continue to do exceptionally well but investors shouldn’t expect the same high growth rates as the last two years.  In fact, in some economic cycles, especially those dominated by inflation, commodities become the only productive asset class. There is real potential for that outcome now. 
3. Long term bonds should start to perform better as the Fed threatens to push up short term rates.  Today the 30-yearTreasury bond broke out to a new 8 month high.  Still, expectations for bonds to be a highly productive piece of any portfolio should be kept in check.  Bonds at this stage are just a safe haven offering a little volatility control in your portfolio. 

Getting (Re) positioned for 2022 

I’m going to say this again as a final warning as we head into 2022.  The greatest risks I see in today’s market is the very high concentration of wealth among a few mega cap technology names.  You know the names.  Apple, Amazon, Google, Facebook (Meta), Microsoft.  These names have become an enormous piece of our country’s annual GDP in terms of their enterprise value (see below courtesy of Crescat Capital LLC) – 37% to be exact.  Similarly, these same names collectively represent a weighting of over 30% in the entire stock market.  I always like to ask, what could go wrong? 

I’m not going to be the guy that tries to explain why, how, or when any of these behemoths could see their stock prices fall.  I can only say that once a set group of names climbs to this type of dominance in the economy and the financial markets, the results looking forward have not been great.  Crescat also showed the last time we had a concentration of financial wealth in just a few names.  That time was the year 2000 when our markets were dominated by GE, Cisco, Exxon Mobile, Intel and Microsoft.  Of those five, only Microsoft has generated a reasonable return on an average annual basis over the last 21 years.   

Average annual returns (including dividends) since the highs in the year 2000 through yesterday: 

GE                         -4.62% 

Cisco                    -0.08% 

Exxon                   +4.68% 

Intel                      +0.31% 

Microsoft            +10.52% 

Back to the script.   If I were a betting man looking into 2022, I would consider (re) positioning my portfolio to have a more reasonable weighting in these names or any others with clearly ridiculous valuations (TSLA, NFLX, NVDA).   

At the same time, we investors should all acknowledge that if these companies run into trouble for whatever reason, they will take the market with them by the shear fact that of their market capitalization weighting in the stock market index, notably the S&P 500.   

In just the last few days, we have started to see some real unbridled selling in technology names with stock prices that simply don’t reflect current earnings growth in any way.  Today, we heard about Docusign (DOCU) which is down -40% as I write after missing earnings by a mere $26M last quarter on earnings of $574M!  That’s not a big miss but it is a very big reaction to the news!  Pay attention to these things.  Salesforce (CRM) and Adobe (ADBE) lost over 9% in single day reactions as well.  Tesla is down 6% today on no news at all.  (Re) positioning for 2022 and profit taking appears to be happening now among names that are wildly overvalued.  I fear for the future of Cathie Woods and her infamous Ark ETFS (Next gen technology funds) that are moving quickly toward losses in excess of -20% YTD.  

Where Should We Look to Buy? 

Always a great question.  Regular readers know the answer, but I’ll spell it out clearly for any DIY investors out there.  Stock purchases should be in the value side of the market where prices are low relative to earnings growth.  We have been accumulating these names in the last three weeks.  Take a look at this Market map provided by FinViz.  

To understand what you’re looking at you don’t have to do much more than squint your eyes and look for green spots.  This is a market map showing the Price to Earnings Growth (PEG) of the components of the market index.  A number higher than 1 shows a stock that is generally overpriced relative to its current earnings growth.

Note a name like Salesforce (CRM) that is showing a PEG ratio of 9.29.  Salesforce got slammed by investors this week.  Tesla at 4.86 is no deal.  While not as overvalued, the same goes for MSFT, AAPL and AMZN. If the current price action is any indication about where gains will be had in 2022, we would recommend selectively looking for lower PEG ratio stocks aka the value sector.   Note- PEG ratios should not be anyone’s sole evaluation metric.  

As mentioned above, Commodities can also be held or accumulated on pull backs like the one we are seeing now.  There is higher risk in commodities today than 12 months ago, but the trend is still our friend here and the cycle says hold commodities for now. 

It’s also not a bad time to add back some bond exposure just to control volatility as we move into 2022.  Longer term bonds (TLT) are showing the best price action as the market is betting the Fed controls future inflation.  I’m not so sure but I would avoid short term bonds in the coming months as you will be fighting the Fed while they try to manage inflation. 

All in, these are slight but potentially significant changes that investors should consider as we move toward 2022.  We are making these changes to our clients’ portfolios now.   I read somewhere that past performance is no indication of future results.  I would modify that statement to the following. Past performance rarely, if ever, indicates future results. 

What a great time to consider (re) positioning for 2022. 

Stay tuned for more ideas on year-end financial planning and tax strategy coming soon. 

Cheers 

Sam Jones 

   

 

 

Why did I just listen to a nine hour audio book of Warren Buffet’s “Ground Rules”?

Get Your Mind Ready

Living in Steamboat Springs, CO, I have seen my fair share of elite winter athletes mentally preparing for the ski course ahead. They are standing at the top of the course, eyes closed, in the moment of perfect memory, virtually skiing the gates ahead of them. I find myself, doing the same now as I believe the markets are approaching the “start” of a profoundly different market environment that will differ from what many have accepted as permanent leadership.

In preparation, I thought it would be helpful to step into the metaverse of those great money managers of all time who were at their peak in the early 50’s through the 1970’s.  Hint there really aren’t many still alive, beyond Buffet. My takeaway after digesting “Ground Rules” was that Buffet really was (is) an exceptional money manager. His boldness as a 20-year-old was just shocking but in a calculating, educated, disciplined way that is nearly the polar opposite of a lot of the behavior I see today. “Ground Rules” is a long walk through Buffet’s annual investor letters in which he openly talks through his own journey and evolution in identifying unique investment opportunities different strategies within his own skill set, never reaching beyond his own ability nor forgetting his own rules for margin of safety with investor capital. Buffet was the protege of Benjamin Graham, The Godfather of qualitative value investing and a survivor (winner) during the Great Depression. That mentorship certainly forged a lifetime bias in Buffet as a value investor that served he and his investors incredibly well for over 7 decades to date.

The Start

In the last update, I described what I am excited about. This is an extension of that commentary but want to focus more specifically on the developing opportunity to accumulate stock in companies, sectors and asset classes that are selling at historically cheap valuations. I believe this is the start of a secular move where value dramatically outperforms growth as we quickly and not so quietly, graduate from a world dominated by a just a few mega cap growth names. I realize this is now a well-worn story in the financial news, but remarkably, investors are not acting on this opportunity in any scale (yet). Bear with me as I walk through the evidence and set some expectations for our clients heading into 2022.

Why Value Now?

1. Valuations – I know that’s sort of silly to say. Let’s buy Value because it’s “valuable” ! They say, a stock’s valuation doesn’t matter until it does. Now is the time when valuations matter. Today we have a market that is dominated by growth names selling at absurdly high valuations by any measurement (P/E, Price to Sales, Price to Book, Price to Earnings Growth, Earnings Yield… take your pick). Meanwhile, I am now seeing a small but growing number of companies with expanding earnings, high dividends, low debt to equity selling at prices that are approaching their liquidation values. I presented some of these ideas last week with my commentary about Ford vs Tesla. In full disclosure, we sold the last of our TSLA shares in our New Power strategy above $1200 last week. Apologies for realizing the gain for those with taxable accounts. We will continue to add to Ford on pullbacks. Buffet has got to be excited with the prospects for Berkshire Hathaway which is probably why they just executed an enormous buyback of their own shares this week. There are other “Fords” out there for those brave enough to act with discipline and avoid caving to conventional thinking.
2. Inflation – You know my thoughts on inflation. It is not temporary unless temporary is 3-4 years for you. Please reread any of the posts in the last 12 months as to why inflation is not temporary. We are now approaching the end of year 1 and it is just now becoming something of a headline. Inflation is the enemy of companies that are owned for their growth prospects. Why? Because inflation makes FUTURE earnings less valuable than earnings (or dividends) paid in today’s dollars. Growth companies reward investors for FUTURE earnings while today’s value-oriented companies reward investors with earnings and dividends TODAY. Recognition that inflation is real and persistent should drive investors into the value sector and out of growth. This is a special moment in time, right here, right now for those looking to reposition their portfolios as the relationship between growth and value is stretched to a historic extreme. If the past is our guide, we would not be surprised to see value investments continue much higher even as the growth side of the market experiences bear market type losses.
3. The Fed is Trapped – Powell is going to lose his job because President Biden doesn’t like the sound of “Bidenflation”. There was a lot of chatter leading up to the last Fed meeting about how they were going to taper their purchases of bonds in the coming months. Yes, they are tapering their bond purchases, but this is not tightening in any way, it’s just less accommodation. In fact, statistically, the Fed will be purchasing another $400 Billion in credit and bond securities before they are finished next year according to plan. Raising interest rates is something that will happen later, maybe much later, or maybe never considering the Fed’s new laser focus on employment. They know that raising rates and the cost of borrowing will yield higher unemployment and will do nothing to curb inflation. Remember, raising rates only restricts an economy that is stretched on credit. Today, households and corporations are sitting on more savings and cash, respectively, than any time in modern history. We have too much money chasing too few goods with very low labor participation rates. Raising rates will do nothing to curb these inflationary realities.
4. Gambling Not Investing – I’ve seen this movie before. It happens when not so smart and inexperienced investors chase anything that moves fast. It doesn’t really matter what “it” is, just that it’s going to the moon! Gambling culture has moved from Vegas to DraftKings to Robinhood and now to the general stock market. I am admittedly a terrible gambler. The entire notion of betting big on something that offers a low probability of return is simply against my DNA. Gamblers always think they have an edge of some sort that makes their bets a high probability. Ask any Crypto maniac and they will tell about their insights and skill. Don’t confuse brains with a self-fulfilling crowd inspired price frenzy. Those of us who have been doing this for a while have seen speculative markets like these when whispers turn into 30% single day gains. When companies like Rivian come to market with an IPO valuation larger than Ford or GM without having delivered a vehicle yet. When small lot options trading becomes a hobby for home gamers. When things like SPACs and NFTs go mainstream. These are the days. What a great time to reinvent yourself as an investor in real value, real things, paying real dividends and providing real shareholder yield.

Strategy Orientation for 2022

This section is speaking to our current clients in an effort to tell you where we are going with your money and our general orientation toward the markets going into 2022. We are acting on these ideas now, because the opportunities described above are now.

In short, the environment we see looking forward, is one of contrast. The odds strongly favor a move toward a new environment with big winners and big losers and away from the current phenomenon where all things seem to rise in unison (a very rare condition. Strategies that can judiciously accumulate shares of deeply discounted shares now with the intent of holding them for years will stand apart from the broad market and those portfolios that remain locked into yesterday’s winners.

In our all-stock strategies like Worldwide Sectors and New Power, you should expect to see more individual stock names. Our intention here is to accumulate shares here and now, while value is still present and hold these names for longer than we have traditionally in the past adding some tax efficiency, lower trading frequency and more concentrated positions to these strategies. Our approach shifts a bit in the process, with less of a focus on momentum approach seeking leadership and more attention to fundamentals and valuations. Volatility in these programs will necessarily increase as we carry more individual stock holdings.

In our dynamic models like All Season and Gain Keeper Annuity, we will orient our strategies toward oversold asset classes, styles and sizes where value hides. Today, those are in small caps (esp small cap value), internationals and emerging markets, commodities, dividend payers, and inflation beneficiaries like gold, silver, and agriculture. We expect to continue holding just a minimum allocation to bonds as per our guidelines and avoid large cap growth altogether until we see a more attractive set up to reinvest. Volatility should remain roughly the same here.

MASS Income will remain invested in our current near equal allocations to dividend paying stocks (1), high yielding REITS and inflation beneficiaries (2) and credit bonds (3). If rates begin to move higher, we are likely to skew away from bonds.

Our newer Constant Exposure strategies (Wealth Beacon and Direct Indexing) won’t do anything different. Constant exposure is constant exposure. If there is a larger market decline in 2022, these strategies will take advantage by realizing losses, creating some tax credits against future realized gains, while remaining fully invested. Our “tilt” toward small caps, value and internationals remains going into 2022 across all Constant Exposure strategies.

Both of our Income models (Retirement Income and Freeway High Income) will work hard to preserve capital and clip as much income as we can. Admittedly, this is an uphill battle against the tide of inflation. The good news is that once interest rates finally sync up with real inflation, our income models will ride again, generating very stable high single digit returns as they have done under more normal economic conditions. Until then, Income allocations should be looked at as a ballast to any equity investments to control portfolio volatility or a source of cash to cover living expenses rather than a means of creating wealth. Special note – You will always have something in your portfolio that is less productive than other investments. Anything invested in bonds fits this role now. But it’s important to consider the very purpose of your fixed income investments in your portfolio now. Why do you have any fixed income ever? Growth of capital has never been the answer of course. If the lure of higher returns found in stocks is nagging at you, make sure to let us help you evaluate the importance of this piece of your portfolio first. Maybe you don’t need it and maybe you really need it! Everyone’s situation is unique.

The Point

One of our jobs as your advisor and asset manager is to set expectations as best we can. We are your guide with all things financial including the mix of strategies within your total portfolio. When there are significant changes in outlook, strategy holdings or perspectives, we want you to know what we’re thinking. That’s all 🙂 There is no action needed on your part and we look forward to seeing you on your next review.

Cheers

Sam Jones

 

 

 

 

 

I’m seeing some very exciting developments in the current market.  Things are popping again and there are compelling opportunities in sectors that present current value and significant growth potential.  Today, I hear two types of concern.  The first is that the markets are way too high and overvalued.  The other is a palpable fear of missing out (FOMO).  This update will address these fears by showing you what I’m really excited about, right now (and what I’m not excited about….)

Please note this is not a recommendation to buy any of the following securities or investments.  Investors should make their own decisions or consult with their financial professional.  In full disclosure, clients of All Season Financial, may own some or all the following securities in their managed accounts with our firm.

Let’s get into it.

End of October is the End of Mutual Fund’s Tax Year – preamble

Let me explain a little-known fact about our industry, which we saw play out in perfect form on Friday.  October 31^st strangely marks the end of the fiscal year for most mutual funds in the finance industry.  Managers of mutual funds, of which there are still many managing $21 Trillion dollars, use the end of October as a time to do several things.  They want their “current holdings” to look good to their shareholders in those glossy mutual fund prospectuses delivered later in the year.  Looking good means owning popular things, like Apple and Microsoft and Tesla.  Looking good also means NOT owning small caps, internationals, emerging markets, or other asset classes that have been trending down for the year.  In industry terms, this is called “Window Dressing” and it’s a bigger thing than most are aware.  On Friday, we saw all the old mega cap tech stocks get a nice bid higher by 1%+, while small caps, for example, lost over 1% and emerging markets lost 1.5%.

The end of October also marks the day of reckoning for taxes.  Those same managers would necessarily want to sell things held at a loss to minimize their annual taxable distribution of realized gains to their shareholders.  Consider the fact that over 24% of the S&P 500 stocks are negative on the year and you can imagine that managers had a lot of options to sell holdings and reduce their tax liability.  To the market observer, you might have noticed that stocks trading down on the year, traded down a lot more last week as this tax loss selling process was completed.

The good news is that today is November 1^st, and all of the mutual fund manager operational trading is now done!  And today we are seeing real strength on some of the areas that I’m excited about owning.

I’m Excited About Small Caps!

Wow, today was a breakout day for small caps to be remembered!  This happened while the large cap growth names actually lost money on the day.  Small caps finished the day up between 2 and 3%.  Why should you be excited?  Well, if I had a dime for every investor who said they don’t want to put money into the market now because it’s overvalued, I would be retired now.  Consider these facts:

• Small caps are trading at a 26% discount to large caps, one of the widest valuation margins in recent history.
• Small caps have been consolidating gains since March and are now bouncing right off the long-term Uptrend line!
• Small caps have a history of outperforming the market between now and the end of January.
• Small caps are going to benefit from a lot of domestic spending on infrastructure
• Small caps represent nimble companies that can be wildly profitable and adaptive during very dynamic economic times like these. Much more so than large or mega cap companies.

Here’s a snap of the chart of the Small Cap Growth ETF (IWO) which we own for clients as of today.

I’m Excited About GAARP! (Growth At A Reasonable Price)

In our New Power investment strategy, after a long painful summer of consolidation in prices, we are seeing recent and persistent strength in the renewable energy sector (solar, wind, batteries, green hydrogen, fuel cells, etc.).  This has been our expectation all summer as the new $Trillion Federal spending bill takes shape with renewed investment in climate-oriented infrastructure.  Our New Power strategy remains fully invested and just gained 11% in the last two weeks.  Beyond renewable energy, there is also a new group of companies that fall into the basic materials sector, who are reinventing input materials to be less energy intensive, biodegradable, sustainable or otherwise “green”.  One example which we have owned for almost 6 month is Danimer Scientific (DNMR) which makes biodegradable, compostable, polymer bioplastics WITHOUT petrochemicals.

https://danimerscientific.com/ – read all about it

In short, they are finally bringing us a true biodegradable water bottle to serve a global consumer that just can’t stop buying single use plastic water bottles (shame on us!).  We hope to see an end to this madness.

We have made two purchases of DNMR, one in late May and the other in August.  Both purchases are held at a modest loss (still).  But today was a big day for DNMR (+20.39%) and it looks to be breaking into a new long-awaited uptrend after falling more than 70% from its high of last year.  Like I said, investing is often about patience, and I hope our wait is almost over.  I’m excited!

Also in our New Power strategy, we have another great investment in an old name that is going to be a game changer in the electric vehicle space – Ford Motor company.  Yes, we still own Tesla (TSLA) but I’m not as excited about that name as Ford (F).  Ford just raised its dividend last week for the first time in years and trades at a below market Price to Earnings (trailing 12 months) ratio of 19 versus Tesla at 218! For all the attention paid to Tesla which is up 57% YTD, Ford has been quietly up 97% YTD.  Ford is not just the next electric truck.  The Ford 150 is the best-selling pickup truck in the world; almost 1 million units/ year.   That truck is going all electric with the 2022 Lightening!  This truck alone will create a bridge between two cultures.  That truck driving guy that tends to lean far right, will finally have reason to embrace a clean green, electric transportation future.  There will be no resistance because there will be no other option.  Again, I’m excited about the options I see TODAY for new investments like these, (speaking ever so softly to those who think there is nothing to buy today).

I’m Excited About High Dividends That Beat Inflation!

Inflation is a theme we’ve covered at length.  It’s here, it’s going to be here for a while and it’s going higher from here.  Enough said.  We’ve talked about the importance of not sitting on a pile of cash in the bank earning zero, worrying about inflation and a market that doesn’t appear discounted or to have any opportunity.  So, here’s another great option.  Our MultiAsset Income strategy is currently generating an estimated annual dividend yield of 6.26%.  Inflation is running at 5.3%.  Now, if the prices of all 38 securities held in this portfolio did nothing for an entire year, your portfolio would still beat inflation through the dividends generated. For instance, one of our holdings is AGNC Investment Corp. (AGNC) which pays an annual dividend of 9.39%.  This is a company that effectively leverages Federally backed (agency) mortgage securities into a dividend generating portfolio.  YTD AGNC is up 9.69%, but down from it’s high in June by 14%.  Every month, AGNC pays its shareholders 0.12 per share.  So, for the last 5 months, while the price has been falling, we have received over 4% in dividends.  All good!  AGNC is very likely to continue higher in price, but the point is, you get paid to be patient!

Thus far, the prices of our holdings have been appreciating very nicely as the world is hungry for dividend yield.  MASS Income is up over 23% YTD in total return net of fees adding to the 26% gains generated in the last half of 2020.  The strategy is well diversified in equal thirds to stocks/ stock funds, alternatives, and bond/credit funds.  We’re happy to walk anyone through the holdings and the strategy but suffice it to say that this is exciting stuff.

Other Things I’m Excited About

• Having a great team at All Season – they are the best!
• Being an empty nester – new chapter
• Getting in another day or two of fishing before winter hits
• Tacos and Tequila – Sarah and I last night

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Things I’m Not So Excited About (speed round)

• Investors who think this is a game and love to gamble with their net worth for entertainment
• Metaverse
• SPACS, NFTs, 6500 new crypto currencies in the last two years
• The concentration of market capitalization in 5 names (you know the names)
• Higher taxes
• Treasury bonds
• Crazy politicians doing crazy things (still)
• Worrying about a fight breaking out on my airplane
• The cost to fix my dryer – $481

That’s it for this week, enjoy the last of Fall!

Cheers,

Sam Jones

 

 

 

 

 

 

 

 

 

         It seems that our last update regarding what to do in the event of a correction was pretty timely.  Now, that we’re in a correction, the question on everyone’s mind is whether or not this is “that time” to add cash to investments, rebalance, realize losses and all the stuff we suggested in our update.  Read on for a murky answer to that question. 

A Little Context 

         First let’s back away from the moment and look at the big picture.  The US stock market is now arguably the most overvalued in modern history.  If one is looking for some relativity to that statement, we could say that stocks look relatively more attractive than bonds or real estate.   We can also argue that stocks are relatively not that overvalued considering the very low interest rates.  But let’s not kid ourselves into thinking that stocks are cheap by any stretch.  They are either the most overvalued of all time or the second most overvalued of all time, one of the two.   

         Now think about a good sale or discount.  What makes a good discount?  Is it 10%?  20%?  30%?  What number would compel you to act on a purchase of something you wanted in the retail world?  20% usually piques my interest, 10% not so much.  Well for all the drama in the last couple weeks, the US stock market is barely off its high by 5%.  Does 5% compel you to act?  I am not compelled. 

         Finally, let’s look at what lies immediately ahead from several fronts.  First, we have what has been called a mega mashup of political fights in congress for the next 30 days.  They are fighting about rather large issues that will have a profound impact on the economy, possible default on Us Treasuries, natural disasters and Covid relief, tax policy and the big infrastructure spending bill.  The House narrowly passed a bill yesterday to “suspend the debt limit and delay a government shutdown”.   

https://www.reuters.com/world/us/us-house-vote-tuesday-fund-govt-through-dec-3-raise-debt-limit-2021-09-21/ 

         This bill is unlikely to pass in the senate, but we’ll see. The debt ceiling issue is always an annual dog and pony show and we know how it will end.  They will expand the debt ceiling but the “show” this year is going to a big one with competing powers on both sides of the aisle not wanting to budge. For now,  they are trying to buy themselves time to have a good public fight.

Second, we have seasonality which is negative until the middle or late side of October.  This factor is a blunt instrument for trading but the pattern over the years is pretty well worn with September and October being two of the worst months of the year historically (reasons unknown).   

         Third, we are entering a new earnings reporting cycle starting in mid-October.  Earnings for the 3^rd quarter will look back to earnings from the 3^rd quarter of 2020 which will still compare well on a year over year basis but not nearly as BIG as what we saw in the year over year comparisons from the 2^nd quarter of 2020.  April, May and June of 2020 (the 2^nd quarter) marked the very worst conditions for most companies in their histories.  But the 3^rd quarter showed a significant increase in earnings and activity.  So long story short, it’s going to be tough for earnings to look as good as they did last quarter.  Given how stocks are priced, we might be ready for some earnings disappointments in the weeks ahead. 

         And last, we have a bunch of other junk acting as unknowns and headwinds to stocks.  They are China and their little real estate developer problem, COVID Delta variant, and whether or not this thing is contained, a slowing economy that is now measurable on many fronts, and very high Inflation (more on this in a minute).   

         If I pile up all this context in terms of timing and headwinds and compare it to a market that has corrected ONLY 5%, I have to wonder if we’re looking at a real discount at all?  Is a 5% correction enough to create value, or discount the list of serious issues directly ahead?  Probably not.   

Get Ready…. Get Set 

         Think about our situation now as sitting at a traffic light that is showing red.  Red means stop and wait for the green light.  Red means, if you choose to move forward through the red light, you could get hammered by something moving fast.  Red means wait.  We know that the next light is green however, so this is a good time to “Get Ready and Get Set”.  What does that mean in investment terms? 

         Getting ready to take advantage of any pullback requires action.  Here are a few ideas for everyone out there including our clients and anyone trying to manage their own money: 

1. Add cash to your investment accounts but wait to deploy that cash.  This might be your planned annual IRA contribution, funding a 529 plan, or just adding cash to a taxable account (assuming you have more cash in your bank than desired). Moving cash into your investment accounts is an action item, get er done.  Do it today. 
2. Start making a shopping list of potential investments to buy.  We have a systematic approach to finding our next investments based on relative strength, leadership, oversold, valuations and general asset allocation guidelines.  We have cash ready to deploy but will let the market tell us where to deploy that cash with a special eye toward potential new leadership.  Right now, I see no leadership…. Anywhere…. One more clue that it’s too early to deploy cash.  But it is time to actively shop and explore.  
3. Take a second to look through your portfolio to identify which positions you hold at a loss.  Given that over 30% of the market is now trading below a 200-daymoving average, I’ll bet you have more than a few.  These might be candidates for sale in taxable accounts in an effort to “harvest your tax losses”.  If you feel the need to raise cash, this might be a time and place to get that done.  Selling securities held at a loss creates a capital loss that you can use against future gains in your year-end calculations of net realized gains.  Remember, our goal is not to sell and sit in cash forever but rather to sell, capture the loss, and redeploy the proceeds into something more productive and promising.  Again, this is only a relevant action item for securities held in taxable accounts. 

Inflation and the Fed 

         I’m going to finish with a little macro-opinion because today is Fed day so I feel compelled.  Jerome Powell had the hawk beaten out of him by Trump and Co. back in 2018 when he was personally and squarely blamed for the 20% market decline by tapering bond purchases and raising rates.  Powell is not willing to be the nations’ punching bag again, probably not again in his career.  Powell is therefore likely to talk down inflation (as temporary!) and come up with any and every reason why the Fed needs to continue to support the economy (weak employment, weak economy, etc.).   

         We also know that practically every public measure of inflation is understated, almost to an absurd level.  The Fed is broadcasting the Personal Consumption Expenditure (PCE) index as their measuring stick which is now less than the Consumer Price Index (CPI) which is WAY less than the Producer Price Index (PPI).  My best guess for real inflation in our country is that the cost of living is currently increasing close to 6%.  I pull that number from the average annual change in wages in the private sector which is just under 6% for the last 12 months.  I suspect employers are trying to keep wages in line with the real cost of living for their employees in order to retain them.  Anyway, the point is that the Fed needs to show a different number than reality in order to avoid embarrassment in not doing their job (Fed mandate is price stability and full employment).  Prices are not stable and we are not at full employment.   

         The problem for the Fed as we move forward in time is that their arguments surrounding the temporary nature of inflation are going to become thin and hard to defend.  I want to highlight one of the biggest contributors to the Consumer Price Index which is housing costs represented in the index as a combination of “Rent of Primary Residence” and “Owners Equivalent Rent”.  Note that neither variable includes the real prices of homes sold but rather the rental equivalencies.   What we’re about to see is that rents in our country are going to go up, straight up.  Rents follow home prices with a lag of about 13 months.  Look at the chart below from the BLS that is circulating everywhere. 

 

         You can see that rents (shown in blue) are experiencing an historical divergence with actual home prices (shown in Red).  We are also approaching the 13-month time and place when we would expect rents to chase prices.  Furthermore, the rent moratorium is now over, not extended by the courts, so landlords are free to raise rents or evict.  It’s a sad moment for many who are renting as they are about to get some harsh notices from the property owner.  This is always what happens when we try to control prices in anything.  Once the price control is lifted, they race hard and fast to get where they want to go.  Rents are about to go as sharply as what we have seen in home prices over the last year.   

         Here’s the critical takeaway.  31% of the CPI index is comprised of these housing rental costs.  If rental costs are going sharply higher, CPI will go sharply higher and the Fed is going to be embarrassed into acting swiftly (tapering bond purchases, raising interest and admitting that inflation is not temporary).  From a timing perspective, we’re looking at early 2022. 

         I wanted to include this macro commentary because Federal policy has a direct impact on the financial markets.  Today they are our friend; they will say nothing today that disturbs the market.  We might even get a brief relief rally in prices.  But the trend of Fed policy is not so benign looking forward as conditions out of their control, impact their stance.  Clearly, we want to be aware of the context of timing and the environment in terms of what we buy, how much and when.  As such, I believe we are quickly entering a new regime in which the typical “buy the dip” strategy becomes more challenging and we might consciously wait to buy bigger dips and deeper discounts.   

Enjoy the Fed Commentary today… or take a nap, you won’t miss anything 

Sam Jones      

 

       This is an important update for any and all investors.  We offer this advice in the vein of financial literacy such that we can make smart, productive, and rational decisions when adverse market conditions compel us to do just the opposite.  

Focus on the Things You Can Control 

       Risk management in the investing world attempts to control a lot of things including portfolio volatility and absolute downside losses when the financial markets experience deep corrections or bear markets.  The practice is both art and science.  But there are limits to what any form of risk management can accomplish.  To be clear, risk management does not eliminate risk, nor does it try to sidestep every down week or negative giggle in the markets.  It is about reducing volatility and reducing downside losses to a tolerable level such that recovery periods are shorter in both time and magnitude.  Risk management cannot control what the market does of course, we can only respond to what the markets present us in both risk and opportunity.  To the point, as investors, we can only control our behavior.    “The market” is never wrong, just our assumptions about what it should do and our reactions to real price action.  

Now with that said…

Will Brennan, CFP Advice- Best Practices for Investors Following a Market Correction 

       I asked Will to write up a specific piece of advice for our clients.  The question I posed to him was this. 

Will, from a financial planning perspective, what should investors do after a deep market correction or even a bear market? 

Here’s what he had to say. 

Will Brennan, CFA, CFP 

       Following-up on our recent piece concerning return expectations, we are publishing a roadmap or checklist of action items to pursue in the event of a market selloff or correction. Market corrections, defined as drops of more than 10% from recent highs, have occurred in 11 of the last 21 years (source: Charles Schwab). Going back even further to 1980, the S&P 500 has seen an average intra-year decline of 14.3% despite annual returns being positive in 31 of those 41 years (Source: JPMorgan Guide to the Markets). That said, corrections are normal market events that, while scary, present good long-term financial planning and buying opportunities. While we cannot predict when a market correction might occur, we want you to understand the ideas and logistics of how to react during a selloff or correction: 

1.) Harvest Tax Losses

• a)A selloff or correction might provide an opportunity to realize (harvest) taxable losses.
• We can simultaneously reposition the portfolio to catch the subsequent market rebound.
• Realized or harvested taxable losses can be used to offset future capital gains OR to reduce ordinary income by $3,000 per year.
• Unused losses may be carried forward in perpetuity.

2.) Stay Invested but Rebalance

• Similar to number 1, a sell-off or correction may afford the opportunity to reposition an individual’s portfolio by asset class as well as by strategy type (active to passive).

3.) Ante Up

• While staying invested during market selloffs or corrections is paramount, it also presents opportunities to buy risk assets at cheaper or distressed prices.

4.) Accelerate or Bunch Retirement Plan and/or College Savings Plan Contributions

• Selloffs or corrections provide great entry points for retirement plan and/or college savings plan contributions.
• If you find yourself in a correction, it may be wise to accelerate or bunch planned contributions into these accounts.

5.) Consider Roth IRA conversions

• Selloffs or corrections may allow for opportunities to convert dollars from pre-tax IRA accounts to after tax Roth IRA accounts.
• This would require taxes to be paid up front.
• Future growth on converted dollars is TAX FREE and not subject to required minimum distributions.
• Before recommending Roth IRA conversions, we encourage a careful examination of your tax situation today and in future years.

6.) Consider withdrawing cost basis from Annuities or Variable Insurance Products

• Selloffs or corrections may allow for tax free opportunities to withdraw the cost basis on Annuities and/or Variable Insurance Products.
• Before recommending withdrawals from Annuities or other Insurance Products, we encourage a careful examination of your tax situation.

Great Advice! 

       Of course, we’re here to help all our clients navigate these decisions when the time comes, and the time will come.  Think about these things and get yourself ready to act when the time comes.  Let’s turn a market discount into the opportunity that it is! 

Changing our Asset Allocation Mix in Response to Market Conditions 

       What a perfect time to provide a quick update on a change in our dynamic asset allocation model made effective last Friday.  Again, we’re not forecasting, nor trying to control the markets, just our response to conditions as they unfold.  These changes are happening in our flagship All Season and Gain Keeper annuity strategies which by design actively overweight and underweight investments into (and out of) various asset classes based on empirical evidence and price trends.  Other equity only strategies like Worldwide Sectors and New Power are making adjustments as well mostly by raising some cash and selection criteria.  Our passive programs like MASS income and Wealth Beacon strategies remain fully invested- as they should. 

The market environment today is beginning to respond to several key factors in terms of strength and weakness in sectors and asset classes.  The key factors are as follows in no particular order: 

1. Increasing recognition that inflation is not temporary – Latest PPI number was shocking, inflation now running at 8.3% year over year. 
2. Likelihood that the Fed is going to be forced to respond to inflation sooner than they suggested.
3. Recognition that we will continue to see BOTH labor shortages and persistently high unemployment (we have spoken of this phenomenon several times in the past few months).
4. The post Covid economic recovery is showing clear signs of weakness now.
5. Treasury bonds and interest are more focused on inflationary pressures than economic weakness (Treasury bonds). 
6. Inflation trades are showing new signs of resurgent strength after a very weak summer.  
7. Housing prices are flattening – lower growth and increasing supply but not price declines.
8. Transportation sector is under fire – this is one of the economically sensitive sectors to watch for early signs of economic weakness.
9. Earnings season has been very strong but year over year comparisons are going to be much tougher in the 4^thquarter as we push past the depth of COVID data in 2020. 

        Jason Goepfert of Sentiment Trader, maintains a Macro Index Model that effectively mashes all this stuff together and plots the aggregate against the stock market.  As a thesis, the markets tend to have a very high correlation to trend in the Macro Model, give or take a few months.  Last week, Jason made note that their Macro model just hit the 2^nd lowest level since the last bear market in 2008.  In other words, the economy is not nearly as strong as the markets would suggest. 

 

At the same time, we are seeing very clear evidence that inflation is still running much higher than expected or desired.  The possibility of 70’s style stagflation is increasing every week … and so, without guessing at the future,  our asset allocation mix will follow the evidence of what is happening with these key economic and market trends.  This is never a one and done thing but rather a slow-moving evolution through ever changing conditions. 

Specifically, we have made the following changes to our Asset Allocation mix as of last Friday. 

1. Reduced our World Stock Index exposure by 10% (from 60% to 50%).
2. Increased our Alternatives and Volatility Controls by 5% (from 15% to 20%).
3. Increased our Inflation/ Commodities allocations by 5% (from 10% to 15%).
4. Bond and Credit allocations remain the same at 15%.

       Thanks for reading and stay tuned as we have a lot of great financial planning opportunities as we angle closer to the end of the year.   

Sincerely, 

Sam Jones – President 

Will Brennan – CFP 

 

 

 

 

 

     

      As August comes to a close, I like to reflect on some observations and perspective gained through casual conversations with friends, family, and strangers on time away from the day-to-day data mining and office grind.  I jot down notes of comments that I hear over the summer.  Honestly, I feel like I learn more just watching life around me and listening to people talk than I do reading through piles of technical financial reports.  These are my observations in no specific order with personal opinions regarding expected resolutions. 

Return Expectations Are Very High

      When conversations turn to “what do you do”, and I reveal that I am in the wealth management business, I often get an earful.  If I had to summarize, the consensus is that stocks will not go down more than 10% (before the Fed steps in to save us) and that returns for next year will easily be double digits.   

“ I think the rest of the year should be pretty easy.”   

“Markets won’t lose more than 10%, the Fed has our back.” 

 “I only invest in things that make 15-20% a year.” – my favorite 

Indeed 

      Jared Dillian of the Daily Dirtnap posted the results of investor surveys showing that investors on average expect a 14% gain in 2022.  It’s so nice when data and conversations tell the same story. 

      My Opinion – Forecasting returns is big business for some, but not our firm.  We are trend followers and accept asset class trends as they come and avoid relying on dependent variables.  However, human nature is one of the few things we can depend on when it comes to investing.  We silly creatures have operated under a nearly perfect inverse relationship between expectations and outcomes regarding market returns for as far back as stock market data exists. When investors are bullish with crazy high expectations as they are now, we know with high probabilities that the market is unlikely to produce those results.  The opposite holds true at major market lows when expectations for future returns are bleak and negative as they were in March of 2020.  So, for this bettin man, I’ll take the odds that the markets are not going to produce 14% until we see prices reset to more attractive levels.  I’ll also take the odds that our first pullback of 10% will not stop at 10%.  2021 should still be a good year, it already is.  But corrections eventually happen and they do create new powerful return and wealth creating opportunities.  I look forward to both… in 2022. 

Real Estate 

Oh my, everyone wants to talk about real estate.   

“I can’t believe how much my house is worth.” or  

“My neighbor sold his house in 1 day for 10% over asking price.” or 

“It’s just crazy what’s happened to real estate.” 

“We are buying a bigger home because rates are so low.” 

      Yes, yes this is what real estate does when borrowing costs are at 3% for 30 years and inflation is running hot at 5-6%. Add the fact that we have a new generation of Millennials who are buying their first homes, sprinkle in some pandemic recognition that you can work remotely from anywhere (why not move to some place great!) and finish it off with a national housing supply shortage.  Voila – prices go up 20-30% year over year!  Nothing crazy, it’s just supply and demand. 

      But there is a new conversation creeping in – carrying costs for housing are also rising sharply. 

      Carrying costs are those pesky expenses that surround home ownership, like mortgage interest, taxes, utilities, landscaping, a new roof, replacing a washer/dryer, snow removal, etc.   

      Anecdotally, a neighbor rents a vacation home for the summer months.  Last week she learned that her leach field would need to be replaced and that her property taxes were going up 35% from the last tax assessed value.  She was very upset.  These additional costs were going to erase nearly 3 years of rental income (net of expenses).  Nothing about owning a home is cheap anymore.  As house prices rise, so too do the costs to maintain and carry them.  Bigger homes have bigger costs 1:1. There is no economy of scale in real estate maintenance costs.  

      We also know that mortgage rates have stopped falling and may be turning up as the Fed talks more often about tapering their stimulus measures, even increasing rates in 2022.  Mortgage interest is not a variable cost for most but a new and potentially higher cost for the next buyer. 

      My Opinion – I see a lot of people buying a lot of real estate and paying some very high prices, carrying mortgages that I can’t imagine.   I don’t like the set up for real estate from here.  If mortgage rates go up beyond 3.40%, real estate prices will fall regardless of the favorable supply and demand stats.   

      This is perhaps one of the most interest sensitive real estate markets I have seen in my career.  Forbes agrees  https://www.forbes.com/sites/billconerly/2021/07/27/the-end-of-the-housing-boom-will-be-when-mortgage-rates-rise-in-2022/?sh=f7cb1e56770b 

      Strange as it might seem, I would also expect rising carrying costs to become a source of selling pressure especially for rental property owners who have been hurt badly by the 18-month rent moratorium which ended today with a vote by the supreme court. 

      Supply of homes for sale should rise from here, while demand for new homes at these prices should fall.  These trends are already happening in certain locations, with price gains tapering or even falling.  With that said, any pullback in prices while rates move higher should present the next great opportunity for buyers.  Be patient now and keep saving for that home.  2024 would be about right if I had to guess. 

      As I have written about before, there is an easy way to own real estate without owning the hard asset and still collect the healthy income.  https://allseasonfunds.com/reits-or-rental-property/ 

Frustration With Summer Chop in the Markets

There is clear frustration with the market performance since last spring.   

“Nothing I have is making money.” 

“I’ve had it with my bonds – I’m going to sell them.” 

“It seems like my portfolio just goes up and down the same amount every month.” 

      Our client portfolios are experiencing much of the same, no big movements up or down for several months now. 

      Bonds or any fixed income investments are now posting losses on a total return basis over the last 12 months.  The 10-year US Treasury bond is down -4.15% including all interest payments since the highs in August of 2020.  Investors are noticing. 

“I feel like I should be doing something different with my bond money.” 

      Of course, losses in the bond market presents a bigger problem.  Retirees, risk averse investors or anyone who uses bonds as a risk control tool are now facing a challenge.  They must either accept the underperformance and stick with their allocations or make a big jump toward risk assets like stocks.   

      My Opinion – Investors need to remember that no asset class goes up in a straight line.  There are times like these when we need to stay patient and wait for a definitive trend.  I can’t say with confidence that the current trend in stocks is either up or down.  It’s just choppy.  Considering the gains off the lows of March of 2020, I think we should all be VERY thankful that we’ve only seen sideways chop so far.  I would have expected a sharp round of profit taking after that run but investors seem willing to ride this bull and give it the benefit of the doubt.  So far, a few months of sideways chop is not a painful experience beyond the wait. 

      On the bond thing – Bonds have traditionally served us well in providing gains and income when stocks are falling.  For as long as inflation is running hot as it is today, bonds are not going to provide that service and function.  They will just gradually lose money as they have been for over a year.  Arguably, there was a time to reduce bond exposure 12 months ago – as we did for our client accounts.  Bond prices were hitting all-time highs while stocks were still deeply discounted from the COVID wipeout.  Asset allocators would use that time and place to rebalance from bonds to stocks and commodities.  Few did but that was the optimal time to do it.  Today, bonds are becoming more attractive as prices are falling and stocks are becoming less attractive.  We could even argue that a prudent asset allocator would begin moving money from stocks TO bonds now.  Again, few will do so.  It’s hard to add to something that is losing and reduce exposure to something that is winning.   

      Our positioning to bonds is very small (15%) by historical standards (~40%) and we have no plans to add to bonds until we see a definitive top in stocks and commodities.  We are still in an inflationary cycle that could become problematic if the Fed doesn’t end their over easy policies very soon.  Inflation is bad for bonds, good for stocks and commodities.  We are in year one of this cycle and have no idea how long we can expect inflation to be with us.   No doubt, investors in any income model are a bit frustrated now at the lack of returns over the last year.  If your financial plan is accepting of a smaller bond position, it’s not wrong to make a change.  If not, stick to your plan, and be patient.  Frustration should never be a reason for making a change to your prescribed asset allocation. 

Let’s leave it there for today. 

      I hope everyone is enjoying the last bits of summer – boys are heading back to school/college this week.  Sad to see them go as always. 

Sam Jones 

 

 

 

 

Today we’re going to reflect back to the days of presidents Nixon, Ford, and Carter from 1969 to 1981. Of course, this was an era of high inflation but also persistently high unemployment. I’m not sure who was responsible for the creation of the “Misery Index” (unemployment rate + Inflation Rate) but it’s becoming a subject of conversation again now for good reason. Those who choose to ignore the lessons of the past are doomed to repeat them.

Back Then

I am not a historian but strangely I found my early undergraduate course work on the economic history and financial markets to be fascinating. Nixon’s economic policies were largely responsible for inflation running very high and out of control through the 70’s and into the early 80’s. You can read all about it here https://www.thebalance.com/president-richard-m-nixon-s-economic-policies-3305562 . Clearly, he set the stage with his attempts at wage and price controls, adding a 10% tax (tariff) on all imports even while our country was moving deeply negative into the balance of payments with foreign countries (aka importing more than we export) and finally the economic atom bomb; removing the gold standard as a peg for the value of the US dollar. Flatly, Nixon the man, was responsible for very high inflation and unemployment culminating in his resignation in 1974 as our country spiraled into recession. An ugly time in America for sure but I was only 7 years old at the time and have no personal memory of events.

By the end of the recession in 1975, the Misery Index (shown above) rose to 19.90% with the unemployment + Inflation rates contributing equally. Then unemployment fell as the economy came off our recession during Ford’s time in office, but inflation continued to march even higher for another 5 years right into June of 1980 when the Misery index reached 21.98%. Poor Jimmy Carter inherited a near disaster of economic conditions and never had a chance to enjoy better times. In fact, the Smithsonian Museum in DC has enshrined President Carter’s sweater that he would wear when addressing the country on TV asking them to turn down their heat (and wear a sweater instead) to help cut living costs.

We can all imagine why the Misery Index earned its name. Inflation hurts those who are living hand to mouth, especially those who are out of work. This is miserable. Life becomes more and more expensive day in and day out as EVERYTHING costs more. Meanwhile, for the unemployed, resources dry up quickly and there is that primal concern that you’ll end up on the street or living a substandard life you never would have imagined.

…and Now

Looking at the same chart on the very right-hand edge, updated through last week, you can see the obvious; The Misery Index has started heading higher and is now approaching the highs set at the very worst part of Covid related unemployment in March of 2020. Specifically, the index in March hit a high of 15.03% (mostly due to Unemployment) and is now approaching 12% with inflation + unemployment contributing almost equally. Remember the economy has largely recovered but we’re still seeing unemployment remain stubbornly high, and inflation is now raging.

How is that possible?

I found a great article posted in the WSJ last week explaining why we are seeing unemployment remain stubbornly high. After reading, you will begin to understand that these are not likely temporary changes. https://www.wsj.com/articles/many-jobs-lost-during-the-coronavirus-pandemic-just-arent-coming-back-11626341401

A few highlights from the article

• “In industries ranging from hotels to aerospace to restaurants, businesses have reviewed their operations and discovered ways to save on labor costs for the long term.”
• “The company (Raytheon) said that most if not all of the 4,500 contract workers who were let go in 2020 wouldn’t be called back.”
• “Applebee’s is now using tablets to allow customers to pay at their tables without summoning a waiter.”
• “The U.S. tax code encourages investments in automation, particularly after the Trump administration’s tax cuts”
• “The company (Marriott) also reduced management staff by 30% in 2020 in its food and beverage department and said the changes would be permanent
• “not everyone can find a match for their skills, experience or location, creating a paradox of relatively high unemployment combined with record job openings”
• “The pandemic accelerated some of the company’s plans to automate factories and implement more digital technology”

So, IF we believe that labor and employment have seen some profound changes in the last 18 months leading to stubbornly high unemployment, THEN we should also recognize two things.

1. The Misery Index is going to be looking a lot like the 60’s and 70’s.
2. The Fed is going to be more accommodative than we might expect in order to support labor while allowing inflation to run hot.

Ok, ok, we can only handle so much macro stuff, so let’s bring it home now.

So What?

The Misery Index today is tracking the Misery Index of the 60’s and 70’s. We can argue all day that conditions are the same or different, but it is what it is. During that long period of high Misery Index (10-22) in the 60’s and 70’s, the stock market experienced several bear markets which actually understated the recessionary pressures of the time. Nevertheless, stocks literally went flat from 1965 – 1982 interrupted by 3 rapid fire declines of 20-50% each. Treasury bonds lost money consistently throughout the entire period (1965 – 1981). Gold went straight up as did other inflation hedges.

 

 

 

 

 

 

 

 

This was not a great time for most investors who relied exclusively on stocks and bonds in their portfolios as both asset classes generated losses net of inflation. I am NOT forecasting that specific outcome, however there are several important lessons from that time period that will likely playout in today’s markets.

• Selectivity (owning very specific things rather than broad market indices and funds) will be critically important to your financial success.
• Gold and other inflation trades should be given a long leash as core holdings during this cycle. There will be times, like now, when the market tests your conviction. Gold went up 5-fold from 1972 to 1975 while the S&P 500 lost 50%.

 

 

• There were very healthy return opportunities for investors to trade stocks and bonds with emphasis on buying discounts aggressively when they present themselves. Please remember to trade retirement accounts only, if possible, to avoid the heavy tax bite.
• There were many sectors and opportunities to make money in the 60’s and 70’s, including deep value, internationals, real estate, TIPS, hard assets, select small caps, financials, materials, industrials, precious metals, alternatives, high dividend payers, etc. Most of the winners of that time are barely owned today by investors.
• Sitting in cash or short-term bonds, earning zero while inflation runs at 6, 7 – 10% hurts your net worth as the purchasing power of your cash erodes every day. You’ve got to try to generate a return beyond inflation with your investment dollars!

Let’s keep our eyes on the Misery Index as an indicator that should put the 70’s playbook on the top of our desk. History is an incredible teacher if we’re willing to listen.

Markets at a Critical Juncture

For those who have been paying attention, the headline market indexes like the S&P 500 have moved out to all time new highs in July. But this strength has masked a lot of weakness and broad-based selling which has been accelerating since June. Lowry’s Research does some good work on Buying and Selling pressure and sounded a warning alarm last week when the selling pressure rose above the buying pressure for the first time since the COVID crisis was first recognized by the market in February of 2020.

Miser

 

 

 

 

 

 

 

 

 

 

 

Needless to say, this is a very important moment in time for the markets to stabilize and see some buying enthusiasm. Given all the liquidity and cash on the sidelines plus support from the Fed and potential new $1 Trillion infrastructure bill, we would all expect this situation to resolve to the upside as we move beyond the seasonally weak period of August and Sept. But let’s not get complacent. I’ve been doing this long enough to witness two major bull markets come to a surprising end in Sept and October while consensus view held for a strong fourth quarter. Remember, the markets reflect expectations for the future, not the past. August begins the time when investors begin looking into 2022 and adjust accordingly, and thus, this is an important time to observe price trends closely without clinging to our assumptions and judgements.

More than anything, we would advise you to enjoy the remainder of the summer with friends and family. This is that time of year. Let us worry about the markets and how your investments are positioned. Take a load off and do something that makes you happy.

Cheers
Sam Jones

 

Yes, it’s that time again and I almost hate to add to the pile of market commentary out there.  But you asked, so we’ll answer.  What do we see happening in the financial markets for the rest of 2021?

Planning First!

Will Brennan, our lead advisor and in house certified financial planner would be upset if I didn’t preempt any market discussion with a quick reminder.  Our approach to financial planning has changed with Will’s addition to our team.  Instead of starting with investments as a means of maintaining our standard of living, we start with an observation of current income, expense, debt, total assets, and work from the top-down factoring in current investment returns, inflation, and personal longevity assumptions.  We seek an answer to one simple question;  What are the odds that you will outlive your money?  With the E-Money Advisor software, we can offer some pretty detailed projection work to find that answer.  If investments need to be changed to make the plan work, then we have a real, unemotional, and empirical reason to make a change to become either more or less aggressive.  Planning first, then adjusting your investment mix to ensure success is the right approach.  Let’s all keep that in mind for this update as I dive in the murky water of the financial markets.

Markets in the Second Half

There are a reasonable number of representative big market gain years like we just experienced in the first half of 2021.  In fact, there have been 23 years since 1945 when stocks generated more than 10% in the first half, or roughly 31% of all years.  Bespoke did some good work on the historical pattern following such strength in the first half.  History says it’s going to be a good year and we might expect up to 10% in additional gains from here.

Bespoke Investment Group – Equity Market Pros and Cons, July, 2021.

Not to be the glass-half-empty guy but you might also note that all the red negative bars from 1975 through the crash in 1987 were dominated by stiff and persistent inflationary pressures on the economy.  Now that inflation is with us again in a big way (transitory or not), we must respect history and the higher potential for negative results.

Regardless, the second half of 2021 is going to be more volatile than the first half but that just means we all need to buckle up and live with more up and down price action, not necessarily the end of the bull market – far from it.  New volatility showed up in March and again in June.  The easy money was made in January and February.  The same conditions that were established in September of last year, exist today.  Specifically, stocks and commodities are trending strongly higher, global bonds are flat to down.  Within those asset classes, we see the primary trend of Value investing styles taking a long overdue rest while the growth side of the market is taking up some slack.  Similarly small caps are resting, while large caps are playing a bit of catch up.  Commodities are just up, up, and away.  I do chuckle when I see comments to the effect that commodities have peaked based on the recent correction in the price of lumber.

…. Uh no

Commodities in aggregate, led by energy and materials are nearly straight up.  Let’s not make this harder than it needs to be by picking on a few weeks of soft price action in a subset of commodities like lumber, or even copper.  The world needs raw materials and will need even more as infrastructure bills are passed in congress.  This is a new bull market in commodities after 12 years of deterioration and price declines. Furthermore, this is the first correction of any magnitude since April of 2020 in an asset class that is magnificently under owned and underrepresented in investment portfolios.

Investors would be wise to buy pullbacks until further notice.  I would draw special attention to agricultural commodities as well which are also seeing a very minor correction within a very strong uptrend.  We plan to add to our position in Rogers International Agriculture ETN (RJA) in the next few weeks.

Bonds are ok for now but the outlook is still pretty thin and unimpressive through 2021.  The Fed is really working overtime to keep rates low, while doing some behind the scenes tapering through the REPO cash markets.  Effectively they are still buying their own bonds very publicly but selling them at the same time out of the spotlight.  They are worried about inflation but don’t want to spook the financial market by raising rates or doing anything that would upset the economic recovery in place.  We are trading Treasury bonds only, not investing in them.

Opportunities for the Second Half

In the second half, we see a lot of opportunities but investors are going to have to be very specific about what to own and when to buy.  Here are a few ideas.

• Europe and Emerging Markets

Growth and valuations in both areas of the globe are far more attractive than the US.  This is a time to carry an overweight position ETFS like EFA and EEM.  We would caution that the US dollar is currently on the rise making things a little difficult in this space but this could create an opportunity to buy into the summer for those looking to diversify out of the US a bit.

• Financials, Energy, Industrials and Materials

These are sector opportunities that can and should be bought selectively on pullbacks in the 3^rd and 4^th quarters of 2021.  Several of these value sectors are correcting now but these are the classic cyclicals that should continue to ride the path of economic recovery and infrastructure spending.  Disruptors include out of control inflation and change in Fed policy, a change in control in the House or a new painful tax regime.  These are not clear and present dangers.

• Gold and Crypto

This opportunity is highly dependent on the direction of the US dollar.  Gold and all crypto currency investments have been under rounds of heavy selling pressure since the beginning of the year.  Bitcoin is down -47% from the highs in February, Gold is off its June high by -6.5% and gold miners are down about -13%.  From a trend perspective, this would be the time and place for any form of currency alternative to find support and begin moving higher again.  Given inflationary pressure and the Federal Reserve’s predicament with monetary policy, we still like the opportunities looking forward.

• Return of the Consumer

It’s hard to believe given the thrust in spending we’ve already seen since May, but consumer spending is still poised to jump higher in the second half.  As supply chains free up for finished goods, clothing, sporting goods, furniture, etc., the problem of scarcity of items for sale is going away.  Mind you, we don’t think that will ease pricing as much as give consumers their first opportunity to buy what they want for the first time since the pandemic started.  Our local Lululemon store may be going to a reservation system for shoppers just to manage crowds. (LULU – wink).  The same goes for airlines, hotels, and restaurants.  The problem from here from an investors’ perspective is that these stocks have already seen explosive price moves over the last year.  There is no immediate opportunity here but the consumer discretionary sector should be on your watch list, looking for significant pullbacks to buy.

• Dividend Payers + REITS

As interest rates remain pegged near zero with a Fed that has no options but to keep them there, we should all learn to love and hold high dividend paying stocks.  REITS are another perfect option that tend to pay some of the highest dividends and offer a healthy hedge against inflation.  These are gold in this environment, stick with them.

Stock Market Versus a Market of Stocks

People always ask what the stock market is going to do next.  I couldn’t tell you, no one can.  What we can see and identify clearly are price trends, valuation differences, sector strength and weakness as well as macro variables that will directly impact parts of the financial markets.  We believe, with solid evidence, that the environment for investors changed dramatically in late 2019, early 2020.  Specifically, we moved from an environment dominated by the performance of broad index investments to a market that offers great opportunities for investors willing to be more selective about what they own.   If one is simply committed to owning “the market” through any index strategy, you will experience higher volatility and lower returns for the next 5 years than any time in the last decade.  It’s just math according to the work of JP Morgan (Guide to the Markets Q3, 2021).

Owning the market through index investments is not wrong mind you, even as a core piece of your portfolio.  But the tide is turning now and there are huge opportunities to generate non-correlated, high risk adjusted returns if one is willing to look at the markets through a more selective lens. In our shop, we build complete portfolios that include thoughtful indexed strategies while blending in more active, selective, and non-correlated investment strategies.  The magic is in maintaining the right mix of both approaches for your situation.

That’s it for now. Thanks for reading.

Sam Jones

       

        There are all sorts of quips about investors and market trends.  One that comes to mind now is that bull markets try to shake bull riders (investors).  Another classic is that bull markets climb a wall of worry.  The last three weeks has been a clear example of both.  Our investment thesis and conviction has not changed one bit.  We remain fully invested and raging bulls on the Reflation, Reversion and Recovery themes despite the market’s attempt to create doubt in all.   

Reflation, Reversion and Recovery

        These trends are nothing new to regular readers but we did a specific post regarding this idea last February which you can read again here https://allseasonfunds.com/reflation-reversion-and-recovery/ .  Let’s spend a little time with each just to reiterate what we’re seeing and to what degree these themes have evolved since then.   

        First Reflation.  This is now clearly INFLATION, not just reflation.  This theme was initiated in October of 2020 and remains very strong, actually accelerating with the most recent print of 5% in the Consumer Price Index.  That number is understating reality as we’ve discussed for years.  Anyone who is spending money these days knows that rents, healthcare, gasoline, food, college tuitions, restaurants, and leisure, airfare, construction materials, housing, vehicles, etc. are up way, way, way, more than 5% year over year. Shadow stats says 9% now.  That seems right to me.  Regardless, there are three changes that have occurred on the inflation front since February.  The first is that inflation measures are much higher than anyone expected at this time.  The second is that wage pressure and labor costs have gone much higher since February as employers are having to pay up to find anyone.  Last week I went to Qdoba for a burrito.  There was a handwritten sign on the door.  

“Closed – No workers”.   

        This is Qdoba!  Wow.  How much might it cost Qdoba in lost revenue when they must close their store because they simply can’t find unskilled labor (at any wage!).   

        Finally, we heard from Fed Chief Jerome Powell, that inflation is still transitory, under control, but running higher than expected.  At the same time, he said they were not going to be raising interest rates anytime until 2023 while purchasing over $198B in Treasury and mortgage-backed securities in the last four weeks alone.  Clearly, they are working very hard to keep rates low with talk and action.  Score one for the Fed as the market bought the story.  Inflation trades (Gold, Silver, Commodities, hard assets, industrials and materials) were sold off by almost 12% in three short days while bonds and the US Dollar were bid up.   

What? 

        This is clearly the bull market (in the inflation trades) trying to buck the bull rider, nothing else.  Inflation is not transitory and inflation is likely to run very hot for the foreseeable future.  Remember, the Fed is boxed into a corner and has no choice but to continue talking down inflation.  They know that any hint of pulling back on monetary easing will directly affect financial assets negatively and could quickly drive the economy into recession.  They are clearly accepting high inflation over recession given the fact that global economies are still recovering from the pandemic.   For now, the inflation trade is under a bit of pressure and may remain so for several more weeks.  Ultimately, we think the only thing “transitory” is this pullback in the inflation trades and we intend to use this opportunity to add to our positions!  Most of our strategies gave up a little ground in the last couple weeks; No surprise and no worry.  We accept that as part of sticking with our conviction. Historically, big inflationary cycles have lasted 5-6 years.  We are just 8 months in at this point.   

        The Reversion trend we spoke of in February was contextually about Value over Growth and Internationals over domestic securities. Here again we see nothing to indicate either trend has failed as much as just taking a mid-summer nap.  Technology and growth are having a little resurgent moment in the last few weeks but this move still appears to be a “Trade” and not the primary “Trend”.  We talked specifically about how technology and the growth side of the market will periodically offer a nice trade in this update – https://allseasonfunds.com/trends-versus-trade/.  This is one of those times but It’s just a trade.  Valuations for growth and technology are still absurd and it’s going to take a full-blown bear market to bring them back to a reasonable long-term level.  When technology as a percent of the S&P 500 index is less than 15%, you can feel free to load up.  Current, it still stands at 23% of the index.  The value side of the market represented by energy, financials and select industrials are doing just fine still.  Energy made an all-time new high on Friday, while financials and industrials are down less than 2% from their highs.  We are sticking with an overweight position in stocks, specifically value and internationals /emerging markets and holding an underweight position in domestic large cap growth.  Nothing has changed. 

        On the Recovery front, it’s pretty safe to say that we are now in a very robust global economic recovery period and moving toward expansion even beyond the highest levels set in 2019.  Internationals offer the best growth potential still and are looking attractive again.    Last year the market got ahead of the economy especially in some of the leading next generation, infrastructure, Green Wave, and “Biden Agenda” sectors.  Ned Davis Research did some excellent work on the price action in these themes in a recent report.  Many of the hottest sectors of last year peaked between Feb and May of 2021 and have corrected back to what could be very attractive levels as of mid-June.  Take a look at this chart from NDR.  If you believe in the recovery trend and you’re looking to buy the dips, this makes for a good shopping list of sectors to consider.  As usual, set stops on any new buys and live by them. 

            

        As a side note, the list above represents a majority of the investment sectors within our long-standing New Power strategy.  New Power finished up over 80% in 2020 riding the wave of these groups.  New Power just completed a long overdue correction from it’s highs in February and is now trending strongly higher again.  Clients would be advised to add money to this strategy now. 

Just Guessing 

        We are trend followers in our active investment strategies, not trend predictors.  I try hard to avoid the sensationalism of telling anyone what will happen in the future.  I’m going to break protocol here and take a stab at what I think might happen for the rest of 2021.  First, the markets have been in a risk off mode since May following the script of “Sell in May and Go Away”.  That’s not to say that various indexes can’t still make a new high as they have recently but rather the internal technical indicators like breadth, volume, participation and leadership are not as robust now as they were before May.  Summer is a very normal time for markets to take a break but we haven’t seen anything to indicate a real problem is developing for stocks or commodities.  Bonds are in a downtrend and should be held minimally still (or traded).  We believe the reflation, reversion and recovery trends will persist well into the future and until such time as the Fed actually ends their easy monetary and fiscal policies.  At this point, they are saying sometime in 2023.  Any summer corrections at the sector or market level are likely to be short lived on our way to all time new highs in the fall.  Again, the most attractive stuff we see are in the list above, already selling at a steep discount.  Between now and year end, we’ll see a huge infrastructure bill put in place, probably close to $1Trillion.  Infrastructure spending is good for jobs, good for real economic growth and good for stocks.  Long term, they provide a much stronger foundation for the economy than simple tax cuts or any short-term cash stimulus measures.  This will also support the inflation sectors and give some renewed life to materials, commodities, construction supply and building companies.  But pullbacks!  Against these supportive trends, we have a growing risk of runaway inflation and the threat of substantial tax increases for both corporations and individuals.  Either can derail the market so we’ll need to remain vigilant with our risk management systems as we get closer to year end.  For now, don’t fight the Fed and buy pullbacks in the Reflation, Reversion and Recovery trends. 

That’s it for now, thanks for reading 

Sam Jones 

   

 

To most retail investors, the financial markets today might seem to be operating on a Business-as-usual basis. After all, stocks are trading close to their all-time highs which makes up for some lack luster performance in the bond market.  But all things considered, this situation doesn’t seem to be that much different than any other robust recovery cycle for stocks.  All of that is true, but there is actually some heavy drama going on behind the scenes and in lesser owned asset classes like commodities, inflation hedges and Crypto Currencies.  For today’s update, I’m not going to talk specifically about Crypto as much as what is implied by investors’ newfound obsession with the digital stuff, as well as investor implications.

6 Trillion Reasons to Worry About the US Dollar

President Biden rolled out his $6 Trillion budget last week with an $8.2 Trillion spending increase through the year 2031.  It won’t pass as is but let’s assume that we’re talking about a very large number in the way of Federal Spending and associated higher tax rates for any with assets or higher incomes. These are the Democrats stepping directly into the footprints of the Republicans who, over the course of the the last 4 years, are equally committed to untethered spending (stimulus) and seem to be comfortable with federal debt approaching 300% of GDP.

It actually makes me a little nauseous to write those words.  Why?

Because history is a great teacher and there have been times in the past, in various countries, where currency risk associated with this type of spending have not ended well.  The hallmark of all such cycles was of course inflation which we’re now seeing in full color.  Inflation usually starts with a shocking move higher, as we’re seeing now, until the economy just stops in its tracks and goes into a deep recession.  We expect all the above to occur in the next 3-5 years.  Thus far, inflation has been a welcome addition to our current economic recovery giving companies a little pricing power for the first time in decades.  But as we move through time, inflation finds it’s way into the cost of goods, labor costs and resource scarcity chewing into profits and earnings as it goes.  This is beginning to happen now.

Historically speaking, when any government, releases themselves of any form of budget and effectively floods the country with unearned cash and debt, you eventually create an environment where the world no longer has confidence in the underlying currency (and bond markets) of the offending sovereign nation.  This is called currency or monetary debasement.  It’s something that has happened in the past but only in very desperate times, in desperate places and desperate situations.  Think Argentina, Germany post WWI, Zimbabwe.  The United States of America is not a desperate nation, but we’re acting like one now.  For years and years, the US Dollar has been the world’s reserve currency of choice.  Over 80% of all transactions globally use the US dollar.  Here’s a snap of the Trade Weighted US Dollar index.

sw

 

 

 

 

 

 

 

 

 

 

 

When Trump took office in January of 2017, the index was much higher at 88.  It’s now trading around 77 and showing no signs of bottoming at the old lows of 2018.  What we are seeing in graphic form is currency debasement of the US Dollar.  If the current level doesn’t hold, the next level of support is almost 25% lower close to financial crisis lows of 2008.

What’s the point?  Investors would be very wise to watch the US Dollar right here and right now.  Why?  Well, it really comes down to our ability to continue spending and paying interest on our bonds as a country.   Remember that old saying “US Treasury Bonds are backed by the full faith and credit of the US Government” which has the authority to print money and tax citizens at its discretion.

What happens if the world loses confidence in the full faith and credit of the US Government?

Crickets…blink…blink

This is where we’re heading; Towards a long-lasting loss of confidence in the US dollar and the full faith and credit of the US Government’s ability to repay its debt?  I do not see any form of austerity in our future, just currency debasement and inflation.  Consequently, we shouldn’t be surprised that foreign nations are no longer buying US Treasuries, in fact they are net sellers.  The only entity buying US Treasury bonds now is the US government.  It’s sort of scary to be both the lender and the investor in your own product.

 

 

 

 

 

 

 

 

 

Wrapping it up, we are creating some self-inflicted wounds by debasing our own currency and driving investors away from our main source of distribution – the Treasury Bond market.

Enter Crypto Currencies.

For as much as you might hear that crypto currencies represent a new and improved secure, digital payment system, you have to know that the existence of crypto currencies today is mostly about the loss of confidence in the full faith and credit of the US Government and that little piece of paper called the US Dollar.  It’s actually described as digital gold, and as we know, gold has served as an effective value proxy for the US dollar for many decades.  In fact, Crypto currencies and gold are becoming substitutes for each other to a degree.  In a minute, I’ll tell you why we like gold over crypto for the next several years.

Investors have become obsessed with Crypto currencies of all kinds (Proof of Work to Proof of Stake).  The early adopters bought crypto as a Store of Wealth against what we are seeing today in our own currency debasement.  They weren’t wrong and we all saw the likes of Bitcoin rise to nearly $60,000/ coin.  Unfortunately, others have joined the movement late, chasing returns into an asset class that they couldn’t define. They bought it because others before them made a quick buck, pure and simple.

In the last month Crypto Currencies were decimated losing nearly 50% in just a few sessions and settling on a loss of -35% for the month of May alone.  You can bet that these “investors” are asking themselves some hard questions about the legitimacy of the story behind the “store of wealth”.  What store of wealth losses 50% in a few days?  Gold by comparison has 1/10 of the natural volatility of the crypto universe.  Gold has experienced corrections of 11-21% even during long and enduring bull market runs.  But that’s a lot different than the 50-70% losses we’ve seen in Bitcoin in just the last 4 years.

If you think about the big picture, you have to understand how much force, power and pressure exists in supporting the value and utility of the US dollar.  The US government is far more likely to highly regulate crypto currencies, make them illegal tender for transactions, or tax them to death, than they are willing to give up control of the world’s reserve currency and the role of the central banks.  It’s going to be a pretty easy argument for them when hackers of oil pipelines are demanding ransom in the form of Bitcoin.  Last year, $350M worth of Bitcoin was paid to hackers in total.  Why would our government ever embrace a means of payment that serves cyber terrorists?  If anything, I would expect our own government to launch its own highly regulated and highly controlled crypto currency.

I’m sure I’ll get blasted for this statement.

Crypto will never replace the US dollar, but the US dollar’s role as the world’s reserve currency will be less dominant over time.

But crypto (together with gold) is likely to continue its path forward as a sentiment or confidence indicator relative to the value of the US dollar and our government’s monetary and fiscal policies.

Crypto will never replace the US dollar, but the US dollar’s role as the world’s reserve currency will be less dominant over time. 

 

Investor Implications

Let’s talk about using Gold versus Crypto as a hedge against currency debasement.  To anyone under 40 years, you might look at gold bullion or owning gold mining stocks as something “boomers” do.  Crypto is so…. Digital and techy.  Gold is for old people.  In either case, you can’t really buy groceries with Crypto or gold.  However, there are some very interesting developments in the fundamentals behind gold miners specifically that makes them much more attractive than crypto as a hedge.  Consider this;  Gold miners now have positive free cash flow that is higher than the technology sector!

Here are a couple charts courtesy of Crescat Capital, the macro gurus on all things gold.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

On a pure performance basis looking back to January 1^st of 2018, Gold miners (GDX) have a total return of 78% while crypto assets in aggregate (GBTC) have gained 33% through yesterday.  Gold miners now have very high free cash flow and are intrinsically a value  investment with a century of history serving as an excellent hedge against the US dollar.  Crypto has no cash flow and no history.    We’re going to stick with Gold and gold miners over crypto… and I’m not a baby boomer for the record.

Other investor implications.  We are likely on the cusp of a new wave of relative returns favoring international investments which benefit when the US dollar falls in value.  China specifically, is intentionally driving the value of the Yuan higher on their way toward global economic dominance.  China now represents 20% of global GDP up from 10% at the turn of the century. The US by comparison represents 28% of global GDP down from 35% at the turn of the century.  The trends are in place for China to become the world’s dominant economic force over the US.  Our pride as a nation has a hard time with that fact and I expect friction along the way between our countries.  But without pride and ego, we might remain open to investments in Asia.  Let’s leave it at that.

I hope I have answered the many questions surrounding the role of Crypto currency in this update.  As I tell my class of students;  Understand what you own and why you own it today.  I hope all of my crypto friends out there have good answers to those questions.

Happy Summer!

Sam Jones

 

 

 

 

 

 

     

      Good Americans are sitting on more cash right now than any time in the last several decades. It’s hard to get your head around this with unemployment sitting at 6.1%, wage increases flat, and the under reported cost of living rising now at 4-6-8% annually. But this is what happens when the US Gubermint sprays the economy with nearly $7 Trillion in cash and puts a delay on your required payments like mortgages, rents, and other costs. America is flush with cash. What a great moment to consider your alternatives. 

Idle Cash 

      There are lots of measurements of cash in the economy.  One of them is labeled M1 as the most liquid and common forms of cash.  These include checking and savings accounts, ready deposits, and Travelers Cheques (I know, who has Travelers Cheques?).  Look at what has happened thus far in 2021.  M1 is now $18.6 Billion to be exact, up from $6.7B in January!   

       But that’s not even the big number.  M2 adds to M1 by money market funds, CDs and other semi liquid forms of cash that are held in short time frames. 

Wanna guess? 

Did you guess $20 Trillion?   

      Notice the hockey stick type advance in the last 12 months associated with all the Federal Stimulus.  Also notice the rising line since the 60’s. 

Ok last one 

 This cash and assets held in money markets are simply not moving.  There is something called the Velocity of money and it measures how often a dollar moves around the economy and circulates.  It is a measure of economic activity, investment, and general commerce. 

      Notice the steady decline since the year 2000 and the near cliff in the last 12 months on the right side of the chart.  All of this cash is not moving!  I won’t go down the rabbit hole to far, but this is what happens when Federal stimulus effectively replaces economic activity as it has very clearly since the first days of QE in 2000.  This cannot, should not, continue for many reasons.  The primary reason is the unintended consequence of very high inflation which we’re seeing play out now.  Inflation requires us to use more money for the same products and services.  In the process, we’ll see the Velocity of Money turn up now, but not really in the good way.  Hopefully, we’ll see real economic activity develop at the same time but so far, it’s nothing compared to the monetary influence of massive federal cash infusions…. But I digress. 

       The remainder of the update is devoted to those carrying great gobs of cash.  I want you to consider the realities of sitting on cash for extended periods of time as well as the various options you might consider in the current environment. 

 Realities of Carrying a Lot of Cash 

       I have said that cash gives you options and that is true.  Cash is an option.  The option to buy anything at lower prices.  Cash is also a risk control asset, meaning it’s there for you rain or shine to cover future expenses giving your investments time and space to rise and fall without worry.  How much should you carry in cash?  You’ll hear different answers but the rule of thumb is 6 months’ worth of your living expenses net things like social security or other secure forms of income (do not include your wages, investment income, rents or other things that are not secure). 

       But cash is also an unproductive asset.  It earns nearly nothing and actually loses value relative to inflation.  Today, we heard that inflation is now 4.1% with the change in PPI and other measures hitting levels we have not seen since the 80’s.  It’s sort of ironic that we’re also hearing stories of gas lines and empty filling stations.  Inflation will push up closer to reality in the next couple years.  I’d guess we’ll land somewhere close to  7-8% as an annual rate of inflation by 2023 and the Fed will be in full panic.  Cash earning zero minus a 4% inflation rate = negative 4%.  You are losing 4% of your wealth on all cash assets annually at this point in time.  The same argument can be made for those carrying cash and large debt at the same time.  Debt is an expense and cash can reduce that debt.  If you have nothing better to do with your cash, by all means, pay down your debt!   Some find comfort in looking at a big bank balance.  Personally, I hate it, makes me uncomfortable knowing that I’m hurting myself, my family, and my purchasing power later in life.   My students in High School finance would know this as negative compounding and something to avoid. 

      So, let’s keep that 6 months snug in the bank and seriously consider options for all the rest. 

The Obvious Choice – Invest Your Cash 

      I talk to different households every single day.  My sense is that there is a lot of mistrust out there now about the financial markets. This is what I hear in various forms of commentary. 

• The stock market is just gambling  
• The market is rigged against investors and only benefits Wall Street 
• The market is going to crash, why would I buy now at these valuations? 

 Ok, let me pick this apart by stating a few facts.

• There is risk in everything, everywhere, always.
• We avoid things we don’t understand or don’t control directly. 
• Investing is only gambling if you invest like a gambler.  I’m a terrible gambler. 
• Financial markets are actually more predictable than you think. 
• Investing costs have never been lower in history.
• There is more investible value in today’s market than any time since the 70’s. 
• The globe is recovering from a pandemic and about to start spending. 
• You can build a portfolio of securities that pays dividends and interest above the rate of inflation (~7%) right now. 
• Market declines are opportunities to invest cash – We’re in our first correction of 2021 now.   
• You will be alive for a long time. 
• Inflation is going to be higher and more persistent than you think looking forward. 
• The stock markets of the world will be higher 10 years, 20 years, and 50 years from now. 

 Seriously, it is high time to stop making excuses for sitting on piles of cash. 

       If I were sitting on a lot of cash (which I am not and never have), I would consider two approaches to getting invested in the markets here. 

1. I would give myself permission to invest some portion of my cash every month.  That way, I’m not just picking a day or time and plowing it all into the markets.  You will buy monthly and maybe your investment options will be available at a better price over time.  You can try to game entry points for individual securities doing it this way. 
2. I would spend time building a complete portfolio of investments across non-correlated securities with an appropriate mix of growth, income, risk controls, passive strategies and active strategies.  I would deploy all of my excess cash all at once to this mix.  This is my strong preference. 

We can help with all of this of course. 

Buying real things like land, real estate? 

      I just got my appraisals from the tax assessor’s offices for our real estate holdings. Oh my, taxes are going up, up and up.  The costs of owning and operating real estate are sharply on the rise (replacing broken stuff, taxes, new roof, insurance, Utilities…). No one talks about this in the real estate world.  Instead, we focus only on recent sales (high!) , Inventory (low!) and the historically low interest rates (affordable!).  

      Let’s remember a few things.  Homes are a place to live.  Think about spending your money on things that cut your living expenses.  How about solar, how about Xeriscape?  How about smaller home?  Want to buy a rental property or commercial building? Fine, just make sure it’s generating enough free cash flow after all expenses to beat inflation (let’s call it 6% annually). Land, same thing. It must be income producing enough to beat inflation plus taxes. Ready to buy a farm?  Inflation forces our assets to either grow or earn interest.  Real estate prices do tend to grow over time looking backwards at least.  Rental property can also produce income annually if you have good tenants always.  Both are positive and could be considered as a productive use of cash but there is now a larger hurdle for that growth and income and don’t forget to include all carrying costs over time in your calculations. 

Investing in a small business? 

      Maybe, I like this idea but know that these deals rarely work out for the “angel investor”. How many times have I heard, “My buddy is starting a business and wants me to invest”? Uh no. Mostly because this little venture will possibly destroy your relationship – and your capital, most likely. 

      Private equity and venture capital done right can be productive but this is the domain of investors with very deep pockets, giant risk capacity and very long periods of time without the need for income or returns. Is that you?  This is also the part of the economic cycle where you might be exposed to that new start up company that is “talking about going public” outside of a private equity firm.  You might have heard about this from your successful friend who does this sort of thing.  Indeed, there is a wide spectrum of companies looking for private funding, showing fabulous proforma spreadsheets with 300% growth rates and sky-high valuations. You’ll be asked to invest six figures for 1% of the company value which they will dilute with additional share classes in the years to come.  Again, you might consider taking a position here but only with an amount of money that you simply don’t need for 10-20 years and have no expectations for growth, income or returns in that time frame.  The goal is to own a part of the next Amazon at the ground floor.  Maybe it will work!  But with lots of experience here, I would suggest using taxable dollars for these investments.  At least you can write off the loss if you never see your money again. 

Fund the Future 

      Something that isn’t discussed often are the priorities of using your discretionary dollars.  Cash should first be used to fund three things that will definitely happen in the future. These are your own retirement, college costs for young children, and Healthcare expenses as you age. All of these things are tax deductible to you today through retirement plan contributions, 529 college savings plans or Health Savings Accounts (HSA). Funding these provides for you and your family in the future and saves on taxes today. I scratch my head when I see a household sitting on piles of cash with no assets in these three groups when you know with 100% confidence that you’re going to need them. You’re really going to have to do some hard explaining to me to justify why these three are not fully funded each year if you have the cash to do it. Need help building a retirement plan for your small business? Call us. You can put away nearly $58k/ year of income for your retirement and reduce your income tax bill.  I would do all of these things first before entertaining other taxable options in or out of the financial markets.  Again, we can help…. If you ask.   

Thanks for reading! 

Sam Jones 

President, All Season Financial Advisors 

 

 

Inflationary pressures are quacking. We’re going to talk about inflation today and what it means for investors and spending decisions. The ramifications of what is happening now are going to be profound in my opinion for the next 3-5 years. We all need to adjust our thinking, our investments, and our expectations if we are to keep this wild animal on a leash and avoid getting bit financially.

Bill Gross Retired in Feb. of 2019
Jared Dillian of the Daily Dirtnap provided some great commentary in his daily column yesterday about the “Deflationist Cult”. He’s right, it is a cult. Cults in the investing world emerge after many years of a well-defined trend; in this case nearly four decades of falling interest rates. In fact, after this many years, there are many investors and professionals on Wall Street that weren’t alive to see and feel the last time we had any real inflation. Bill Gross, “The Bond King”, born in 1944, was a young adult, and aspiring bond investor in the 70’s and 80’s when inflation ran as high as 14% year over year.

In that time, you were absolutely nuts to own a Treasury bond of any sort as price losses just crushed your portfolio while inflation raged. Bill Gross took the other side of that consensus view and was probably buying Treasury bonds in the early 80’s, in bulk. 40 years later, Bill will be remembered as the greatest bond investor in history posting some of the most consistent and impressive returns ever seen via the PIMCO Total Return Fund. He literally rode the tsunami wave of falling interest rates from the highs in the early 80s all the way to his retirement in February of 2019 from the Janus Funds. I heard an interview with him once where he admitted that there was very little skill involved beyond recognizing the deflationary forces in the system (the Federal Reserve, central bank policy, politics, demographics, etc.) that benefited and supported Treasury Bonds as an asset class.

Bill retired 12 months before the final low in interest rates in March of 2020 . Out of nearly 40 years, I’m going to say that’s pretty impressive timing. Granted Bill is now 77 and deserves to retire with a few $Billion to his name but I would guess his retirement coincided with his own recognition that deflation (and falling rates) was coming to an end on a very long and very meaningful macro scale. At last check, in his own investments, Bill is now shorting the bond market – betting that rates are going to move meaningfully higher for longer than many think. In essence, Bill’s retirement coincided with the birth of real inflation and the high likelihood that associated interest rates will trend higher for the foreseeable future.

Consensus view in the financial services industry is very cult like regarding interest rates. There are assumptions in this view; The Fed can’t afford to raise rates, The Fed is going to keep rates low forever, The Fed is going to impose a cap on long term interest rates, etc. The Fed does not have as much control over inflation as everyone expects. Meanwhile the evidence supporting low rates and deflation is becoming weak and um….not convincing while the evidence that inflation is HERE is strong and compelling.

Evidence
First, ignore the Consumer Price Index – It has become perhaps the most deceptive measure of inflation out there, created, massaged, managed, edited, reformulated, and manufactured to sell the idea that the change in the cost of living in our country (and associate pension payments indexed to inflation) is just 1-2%. Laughable! Does that even feel close? If we only had to spend our money on things at Walmart and the Dollar Store then that might be true, but unfortunately, we all must pay for food, energy, housing, and healthcare that form the lion’s share of our daily expenses. CPI does not accurately reflect the true costs of living anymore. I’m not a conspiracy guy but it would be worth your time to visit Shadow Stats.com http://www.shadowstats.com/ . You’re going to see a lot of hard data and begin to understand exactly how and why our “Core” CPI index has been manipulated. Shadow Stats suggests that the real year over year cost of living increase is now 9.4% as of the end of February. That feels about right actually. Don’t shoot the messenger.

Let’s look at a few other inflationary things quacking! How about Commodities in the last year? Clipped this from Twitter.

How about Home Prices? 

Rising home prices are a good thing for economic growth and personal wealth, but when prices are this high and rates start to rise as they are, affordability drops dramatically. Looking forward, anyone considering buying a home now is naturally a deflationist. You are literally short inflation because you are banking heavily that rates will fall below zero, allowing home prices to rise even more. As a side note, building a home now is probably going to be a shocking experience from an unexpected cost perspective. Revisit the change in commodity prices above for things like copper and lumber. We already have short supply in homes but that fact does not justify building something that is going to cost 30, 40, 50% ? more than you expected. We were entertaining a kitchen remodel in our home last year. That project is not happening anymore.

Headlines Quacking
There is no shortage of headlines talking about the rising prices of everything including the cost of goods sold (COGS). In economic terms, when COGS, goes up, you need to raise the price of your end product in order to keep your profitability stable. In a deflationary environment, demand is the only thing that matters as the costs of everything are either stable or falling with quick and easy fulfillment. In an inflationary environment, supply, availability, and the costs to produce anything becomes the denominator of profits even while demand remains high.

This was a headline following the earnings report from Intel last week:

 

Ok enough with the evidence- there is a lot, we’ll leave it at that.

Ramifications for Investors
Wow, I’m running out of space and your patience, so I’ll keep this brief. Investors need to own inflation beneficiaries and limit or minimize exposure to the deflation side of the markets, notably Treasury bonds. That is not an absolute statement or a recommendation to sell all Bonds! But it would certainly make sense to own very short-term Treasury bonds, TIPS, Floating rate funds, mortgage bonds or other areas of the bond market that do not suffer as badly during inflationary periods. Total bond and income positions can also be reduced as an asset class decision here. Many investors are just sliding from bonds to owning more stocks. That may not be the wisest choice longer term as you’re really just expanding your exposure to risk assets while valuations are at historic extremes.

Other options to consider with a portion of your bond money are non-correlated assets like commodities, gold, silver, metals, inflation hedges, currencies, alternative funds, hedges, REITS, etc. We’ve talked about a lot of these options in recent posts and are actively engaged in all of these in our portfolios now. Today, for instance, we increased (again) our allocation to Gold/ Commodities/ Inflation holdings from 15% to 20% of total assets in our flagship All Season model. The extra 5% was pulled from our “Income” holdings reducing that allocation from 20% down to 15%. These are conscious, incremental, evidence based, trend following decisions and part of our internal process. For the record, our “Income” allocation was as high as 50% this time last year.

Every investor situation is different and we’re here to help you figure out how to rework your outside investments for the new environment. It’s not too late.

Ramification for Spending Decisions
This one is tough, but there is a bit of an old and dusty operating manual for spending habits during inflation.

First, remember that things tomorrow will be more expensive than things today (except housing and a few others). Cost will become a bigger part of daily decision making and you’re going to have to spend more time hunting for what you want at an affordable price. Appliances are already crazy expensive for instance but there will be deals if you’re patient. Find the deal and buy it when it’s cheap if you can.

Second, get out of the mind frame that you can get what you want, when you want it at a reasonable price. It’s just not going to happen. Supply is constrained globally and that may not be as temporary as some might suggest. Plan ahead, way ahead, and think about what you’re going to need in 6 months. Winter is coming, do you need to order snow tires in August? Maybe.

Third, wean yourself from a life of disposable consumption. This is the classic situation where it costs more to fix or clean something than to just throw it away and buy a new one. That moment in time is gone. This sounds like a comment from the Grapes of Wrath, but the best investment you might make now is a sewing machine and a complete set of home tools. You Tube is your friend for all things related to basic car or home maintenance. We all need to relearn how to preserve and add life to our “stuff”.

Finally, reduce overall consumption. Make no mistake, for many in our country, these are the Great Gatsby days of massive consumption. Many more are already there by circumstance and living hand to mouth. But for those who love to spend, its time to start measuring your spending, identify where your money goes each month and look for ways to reduce excessive or unnecessary recurring expenses. Life is going to get expensive; you’re going to need a lot more money just to cover your same expenses as inflation rises over time. We are doing a lot of cash flow analysis for our clients now through a robust financial process, thanks to our new lead advisor, Will Brennan, CFP. Let’s have the conversation and make sure you’re covered.

That’s it for this episode of Inflation, but there will be more, I promise.

Sam Jones