Category: Finding Benjamin

 

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.

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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

 

For most of the last five years, I have been researching rental properties as a potential means of diversifying my own wealth and generating some passive income outside of the financial markets.  I don’t really know why other than it sounded like a good idea and I have a lot of friends who do it.  Honestly, I struggled to find anything that “penciled out” either in terms of income or total returns.  I just couldn’t seem to make the numbers work given purchase prices, rental rates, upgrades, taxes, etc.    In March of 2020, the financial markets provided a solution in the form of deeply discounted REIT investing.  I am no longer looking for physical investment in real estate and find REIT investing far more attractive.  Here’s why.

 

What is a REIT?

A REIT is a Real Estate Investment Trust that is effectively an entity that owns and operates hard asset real estate and is by law required to distribute to shareholders 90% of net income in the form of dividends.  REITS come in many forms, shapes, and sizes covering all types of properties including residential, industrial, retail, commercial, infrastructure, mortgage REITs, malls, and so forth.  Fortunately for us, investors can invest directly into REITs or through funds (Exchange Traded Funds and Closed-End Funds).  This definition is enormously broad but let’s dive into the details so you can better understand what they are and more importantly, how they compare to owning an actual rental property as an alternative.  Spoiler Alert!  Our new Multi-Asset Income strategy is a REIT investment strategy and has just completed its first very successful 12 months.

Here’s an example of one (of 33 securities we own) closed-end fund in our MASS income strategy, managed by the venerable and highly experienced folks at Cohen and Steers.  Look no further for an all-in-one diversified REIT.  This one pays 7.4% in annual dividend interest paid monthly.  Wow. In the last 12 months through 3/30/21, RQI has generated a total return of over 60% and is still trading at a discount to Net Asset Value (more on this in a minute).

 

Size of Investment

If you’re like me, you don’t have unlimited capital to spend on real estate.  Buying, owning, and managing rental properties is a deep pocket game requiring several $100,000’s just to get started even with a small residential rental.  REITS can be purchased like any stock or fund as a shareholder with minimal investment commitment.  You choose how much or as little as you want to invest in REITs.  RQI above costs is around $14/ share.  Simple, easy.

 

Sell When You Want To

In my long career of investing, I have come to appreciate the value of total liquidity.  Said another way, there is no greater pain than being caught owning something that you can’t sell when you want to.  Anyone who was forced to sell hard asset real estate between 2007 and 2010 knows that pain quite well as prices dropped 20-50% across the country with no buyers anywhere.  REITS can be purchased like any other public security and SOLD with a push of a button.  Note – Some REITS are only offered as private placements and have no liquidity (Avoid these like the dinosaurs that they are).

 

Steady Income Without Tenants

I rented out our office building on Sherman Street for a short period before moving our company into the space.  Keeping the place occupied with tenants that suck the life out of you is nearly a full-time job.  I think I had forgotten that pain when I was looking for another rental.  I’ll never do it again.  Assets held in a REIT or a fund of REITs, receive monthly or quarterly dividends created by the entire pool of properties.  Vacancy rates in the entire portfolio might rise or fall a bit with economic cycles, but it would be extremely rare for a REIT to stop paying dividends entirely.  Conversely, when your rental property goes vacant for a month or two, that might be your entire annual profit net of expenses and carrying costs.  REITs pay regular and healthy dividends for as long as you own them and how nice that you don’t have to take that tenant call at 2:00 AM.

 

REITS Are Now Tax Efficient

There is a bit of misinformation out there about the taxes and REITS so let’s get it straight.  First, read this https://seekingalpha.com/article/4322753-taxman-cometh-reit-tax-myths.  The executive brief is that dividend income generated from REITS (direct or in fund form) is eligible for the Qualified Business Income (QBI) 20% tax deduction as part of the Tax Act of 2018.  The “yield” from a REIT comes to you in one of three forms; Ordinary Income, Capital Gains, or Return of Capital.  Most of the income is “ordinary income” normally which again is reduced by 20% when filing your tax return due to QBI status.  Cap gains are taxed at normal rates.  So, for high-income earners, the dividends that you receive as income are taxed much closer to long-term capital gain rates after the discount – see the illustration below.  This is tax efficient (not tax-deferred to be clear).  You can also invest in a REIT with a taxable account or any tax-deferred account like an IRA.  Conversely, if you want to own a rental property in an IRA, you’ll need to find a trust company to provide custody services and establish a self-directed IRA with plenty of additional costs to do so.  And then there are property taxes, and short-term lodging taxes, and city taxes, and taxes on taxes when owning rental property.  Yikes.

 

Follow the Money

I don’t know how I didn’t know this but REITS, as an asset class, are actually one of the best performers out there for long-term investors.  Like any asset class, they are not without periods of decline and loss but over 10, 15, and 25 years, REITs have done better than stocks, bonds, and commodities.  Here’s a quick chart from NAREIT showing the index performance versus the S&P 500 and the Russell 2000.  For all the lovers of big tech, you should also know that this very basic REIT index has also outperformed the Nasdaq 100 even after internal REIT fund expenses.

 

I can hear the rebuttal.  Yes, this period of 25 years has been dominated by falling interest rates which provide a tailwind to both stocks and all forms of real estate.  To that I would reply; One more reason to own Real Estate in REIT form rather than rental property which is subject to just as much risk of rising interest rates but with near-zero liquidity.  For what it is worth, industry statistics say that rental properties generate between 2-5% net of all expenses on average.  I’ve heard people talk about bigger numbers and seen smaller numbers.  All things considered; I think I’d reach for the potential return found in REITS.

 

 REITS Still Trading at a Discount

I saved the best for last.  Physical real estate is in short supply for a lot of reasons.  We have seen people snap up second homes during Covid. We have seen some buy real estate as a form of wealth preservation fearing the end of the US dollar.  We have seen a new generation of first-time home buyers enter the market and most importantly, we have seen interest rates to borrow money go to near zero.  The perfect storm for crazy price appreciation!  Now, it would be hard for me to say with a straight face that you are going to find a deal of any sort in rental real estate even if you could find something to buy.  Prices are elevated, hyperbolic, overpriced in real estate to the extent that I wish I could short my own house.  Conversely, REITS are now trading at the second most undervalued condition since March of 2009 – happy to provide the data upon request.  Many closed-end funds in the REIT space are still trading at a discount to Net Asset Value, meaning the price of the shares is lower than the value of the underlying holdings in the portfolio.  This is the situation now even after prices have recovered substantially from the lows in March of 2020.  REITS are relatively inexpensive compared to physical real estate because the market prices of these securities were decimated during Covid, down 70-80% from their highs.  Hard real estate only paused and then exploded higher with little to no price damage along the way.  I will say this plainly.  There is still significant opportunity left in REITS and very little price potential left in physical real estate despite the arguments of short supply.  Investing in a REIT is a post-COVID opportunity, especially as we all get back to work in commercial space, fire up industrial space, and go shopping at the mall.  I think we’ll look back in time and recognize that Investing in hard real estate was probably a better bet pre-COVID.

 

Multi-Asset Income is Our Solution

We created the MASS income strategy for our clients in March of 2020 when it became obvious that REITs were going to present one of the best investment opportunities of the decade after COVID.  The strategy does not invest exclusively in REITS but a combination of REITS, preferred securities, high dividend-paying stocks, high yield mortgage, and credit bonds.  We have 33 positions with an aggregate annual dividend yield of 6.82%.  As we approach the end of its first year, MASS income has generated an impressive total return.  Numbers will be available in the next few weeks after calculations are complete from our third-party provider.

This program is not a bond strategy but a fully diversified, k-1 free, completely liquid, Multi-Asset growth and income strategy.  Yes, it’s all that!  Finally, we are also recognizing that the return stream generated from MASS Income on a weekly and monthly basis has one of the lowest correlations to the return pattern of the markets and many of our internal investment strategies.  This program is a true diversifier to your portfolio! Assets in the strategy have ballooned to $10M in very short order.  My conviction is high that this will be one of our best performers for the next 3-5 years and would invite a conversation with any and all regarding a potential investment within your portfolio.  We’d be happy to provide detailed information about holdings, performance, and the asset allocation to any upon request.  The door is open, welcome to our house 😊.

 

Thanks for reading

 

Sam Jones

 

The stock market has officially entered a bi-polar state.   To those who haven’t been paying attention, there are newly established bear markets happening right now and there are new bull markets beginning right now.  A tale of two markets.  None of this should be a surprise to regular readers. Now that technology has been taken out to the woodshed and Treasury bonds are losing value faster than any time since the ’80s, we have to ask the question of what’s next?  Is it ok to buy back technology now?  Have interest rates gone up enough?  Is this value and inflation thing almost done?  Let’s look at the big picture and hopefully you’ll see which are primary long-term TRENDs and which we might consider for a short-term TRADE.

 

Growth versus Value

I will jump to the big reveal early.  Value is now the primary trend of the US stock market. Growth is now a trade.   By that, I mean that investors should remain focused and invested on the value side of the market.  Periodically, we might get an opportunity (one that is fast approaching) to TRADE on the Growth side.  Let me give you a little context for that idea.  Value has been long forgotten for most of the last decade.  Instead, investors have leaned on growth as they usually do during long strong bull markets.  But that changed in 2018.  Since then, Investors have taken the growth thing too far, favoring high-priced and overvalued speculative companies with negative balance sheets and zero revenue.  You’ve heard me complain since 2018 about market conditions, but I am done now.  Value is back, investors have come to their senses and are leaning hard into companies with real and repeatable earnings and dividends with strong balance sheets.  They are even digging deep in the post COVID sectors that now present incredible opportunities.  So, growth is out and technology is the poster boy of growth.  Last week, we talked about “Reversion”.  Look at the table below.

 

 

You will see a sector breakdown of the weightings in the S&P 500 as of last October against the historical median.  Now focus on Technology which even in October represented 26% of the S&P 500.  What you don’t know is that an additional 10% of that number was moved to the Communication Services sector in 2018 (mostly Amazon and Netflix).  The real number for technology is therefore 36% of the S&P 500 because all technology trades together.  We are in never ever land.  The median weighting for technology is about 17.  So, could technology get cut in half just to get back to median?  Certainly.  Now, look at Energy sitting at 2% of the S&P 500 with a median weighting of 8%.  Could Energy rise 4-fold just to get back to median.  Yes!  Mean reversion takes a long, long time, not measured in days or weeks but quarters and years.  Communication Services, Consumer discretionary are probably also reverting and should probably be held with a critical eye.  These trends have just begun.

Meanwhile, Value is in and there are many sector investments to choose from.  This trend is probably 4 months old if I had to put a timeline on it but it is just getting started and often lasts 2-3 years.  Look at this long-term chart provided by Crescat Capital last week.  Given the extreme in this relative relationship, it would be a good bet to assume that Value will continue to outperform growth for the foreseeable future. From the last peak in 1999/2000, it took almost 11 years for growth to retake its leadership overvalue.  I witnessed all of it.

 

But even within primary trends, we will see counter-trend TRADES develop.  That moment is probably coming soon.  Technology companies have been slaughtered in recent weeks with many of the darlings down 30-40 and 50%!  Some growth-oriented investors will start to pick up discounted shares in here and we should see a counter-trend rally develop soon.  But this is my advice.  Be nimble and be quick because growth is a trade from here on out.  You are going to have to buy technology on hard down days which is tough, and you are going to have to sell technology when it’s up big which is even tougher.  Finally, you are going to have to be earlier than the big guys who know more than you and have faster computers.  For those who still own too much technology and “Growth” in their portfolios, I would conversely be patient, wait for a bounce and sell right into it.  Proceeds can go to your favorite value stocks or funds on the same day.  Write this on a sticky note and pin it to your desktop – Value is the Trend; Growth is a Trade.

 

Inflation Here to Stay

Here is the other highly controversial idea.  Inflation is no longer a temporary trade but a new dominant TREND.  I am sure the hate mail will fill my inbox on that statement.  But the data is becoming pretty clear and prevalent.  What is not clear is the mental mess that this fact creates in our minds.  We have been told that inflation is dead.  We have witnessed the Federal Reserve come to the rescue time and time again.  We have even heard the Fed beg for inflation.  That will be viewed as crazy talk down the road when they recognize the monster they have created by their own handiwork. The numbers are likely showing real inflation, with producer prices paid and the services sector, and soon, the highly manipulated Consumer Price Index shown below (thanks to Bespoke).  I might even go as far as saying the Federal Reserve is on the cusp of losing control here.  Inflation is like toothpaste: hard to get back in the tube once it’s out.

 

 

The Treasury Bond market has been screaming inflation for over 4 months now.  Bond prices have fallen dramatically, and interest rates have officially spiked even while the Fed is cheering for more!  Readers know that inflation trades are working quite well.  Those are Banks and Financials, energy, materials, metals and hard assets.  Gold is not participating for now, but we are still hopeful. Deflation trades like speculative growth stocks and highly leveraged companies living on debt are under severe selling pressure.

Commodities are also set to become a productive trend for investors who know how to invest in this space. We have a lot of commodities in our strategies if you care to look.  Commodities do well in inflationary environments and this Trend has just barely begun.  Furthermore, we are seeing some serious scarcity of commodity assets after years of oversupply.  This again from Bespoke.

 

Short supply with a global economy that is emerging from an economic shut down for a year?  This is the big bang; 45 commodities groups are showing supply shortages!  Commodities are part of the inflation trend and not a trade.  Hold em if you got em or buy pullbacks until further notice.

To be clear, the TREND is Inflation (and higher interest rates), and the Trade is deflation for the foreseeable future.  Those who want Treasury bonds will have a chance to buy very soon as a Trade.  But most will ultimately want to reduce their exposure to this unproductive asset class.

Understanding what is TRENDING is critical and investors need to stick with these primary longer-term themes.   Conversely, a TRADE can be productive but is generally something held short term. We are here to help if you have questions about anything you own in your outside accounts.

 

Thanks for reading.

Sam Jones

 

Last month, we presented our Investment Themes for our 2021 Solution Series Webcast.  Thus far, they are looking spot on as our themes continue to outperform the US stock market handily generating some very nice returns in our portfolios.  For this update, I want to reframe the themes using the three “R’s” in the title to help our readers make sense of it all from an economic cycle perspective. 

 

Reflation (Return to inflation) 

The COVID economic disaster did something significant to the macroeconomic picture in our country.  The event most likely put an end to the deflationary period that has dominated our economy since the mid-’80s.  In the midst of the panic, we saw our interest rates drop to zero or negative real interest rates for the first time in almost 40 years.  Simultaneously, we witnessed a federal infusion of dollars and open buying of securities in the $Trillions.  We also saw entire industries literally shut down forcing supply constraints.  Combined together, we most likely killed deflation as a dominant economic environment and opened the door to inflation, or reflation as some call it, for the first time since the early ’70s.  It was not until October however, that the market began to recognize this change and gave the torch of leadership to all things inflationary.  This should not be a new concept to our regular readers,  but old habits are hard to break and many seem to remain stuck playing the game according to the old rules (of deflation).  The old rules say that real-estate prices will rise because mortgages and lending rates continue to fall.  The old rules say that growth (aka Technology) can maintain many higher-than-normal valuations – as long as interest rates (the discount rate) stay low and justify those valuations.  The old rules say that companies can count on borrowing and refinancing their debt to do things like share buybacks and other financial engineering efforts to push prices higher.  And most importantly, the old rules say that deflation generally offers investors a pleasant and smooth return using a simple 60% stocks and 40% bond portfolio.   

But what happens when the old rules do not apply? 

What happens is we see a market that rewards an entirely new set of securities like commodities, energy, basic materials, industrials, durable goods, and generally things that hurt when you drop them on your foot.  This is happening now persistently, solidly, consistently, week after week after week.  This is not a short-term thing but a significant change in the character of the markets reflecting the fact that inflation is happening.  Jay Powell, the Fed Chief was grilled today and I heard more than once, pointy questions asking why the Fed was being so accommodative with fiscal policy and bond-buying when clearly the economy is recovering toward a post COVID world again and GDP might push up to 4-5% growth by year-end!  My guess – Despite all the chatter to the contrary, the Fed will be forced to raise rates before the end of 2021.  The new rules of reflation also favor Gold and currency alternatives like Bitcoin.  Bespoke did some good work on the correlation between Gold and Bitcoin.  Today, that correlation is stretched indicating that gold should take the leadership from Bitcoin any day as a currency alternative. 

 

In other words, now would be the time for Gold to step up and Bitcoin to give up gains.  That almost seems silly to say as I write and Bitcoin is already down 20% in just two days, while Gold has likely started a new bull trend higher. 

But by far, the biggest threat to investors of all types under the new rules of reflation is the sudden and persistent rise in intermediate and long-term interest rates reflecting the new realities of inflation in the system.  Bonds lose money when rates rise.   As of yesterday’s close, the S&P 500 is still up a very healthy 3.21% while the 10-year Treasury Bond is down -2.94% on a total return basis.  In the last week, we have seen both the S&P 500 and the bond market fall together while commodities of any sort including any broad-based commodity fund or ETF, are up 2-4%.  It just does not get clearer than this folks.  Stocks are in, Commodities are in, Gold is in, Bonds are out.  Simple. 

Reversion 

In sync with the new reflationary rule set, we are also seeing a reversion of trends that have been in place for the better part of the last 8 years.  Specifically, we are seeing value outperform growth dramatically and persistently.  Growth is a code word for technology these days and here again, after speaking with many investors, I am hearing the same resistance to accept the new trends.  Old habits die hard, especially when they have been so rewarding for so many years.  I do not know of a Tesla investor who is considering selling their shares.  The stock is only down 20% but still up 722% from the March lows of 2020 after the 5 for 1 split!  I am not going to call a top in TSLA but I will say that if ever there was an iconic name that represents consolidated investor capital at a nosebleed valuation, this is the one.   

Given recent history, investors would be inclined to blow off the recent weakness in the name and might even consider buying more.  And that would be a great strategy if we were operating under the old rules of deflation, falling interest rates, and acceptance of bubble-type valuations.  But we are under a new set of rules now so we should not be surprised to see Tesla and other mega-cap growth names really disappoint investors in the weeks and months to come.  Do not forget, Investor sentiment matters more than just about anything including fundamentals, innovations, and great leaders like Elon Musk. 

Here again, my fav Behavioral Econ chart.  Tesla (TSLA) is approaching #5-#6 in my opinion. 

 

 

Also, in the reversion camp, we continue to see strength in Internationals and Emerging markets.  Non-US has been outperforming domestic indexes since we switched to the new rules in March-May of last year.  This has been especially pronounced since early September of last year.  Again, this matrix from Bespoke.  Internationals are up almost 2:1 since last September outside of US small caps. 

 

 

Recovery 

It would seem obvious to say that global economies are now in full recovery mode.  By itself that is inflationary but this a time to focus on the cyclical sectors that respond well to an economic expansion.  This is the well-forecasted recovery trade and we have a ton of things to buy and own here.  Thankfully, most of these cyclical types of securities are now value trades after being beaten to death by a year of a global pandemic.  These are sectors and stocks trading at historic rock bottom valuations like banking, finance, metals, materials, and traditional energy.  Beyond that, it is probably okay to start incrementally buying into the post-COVID side of the markets like hotels, airlines, travel, leisure.  Have you looked at Disney recently (DIS)?  How about Hilton Worldwide (HLT).  We own a great newer ETF from Invesco – PEJ (Invesco Dynamic Leisure and Entertainment).  It holds equal thirds of restaurants, hotels/ gaming, and Leisure sectors.  It is a rocket that will make every Bitcoin/ Elon Musk cult fan jealous.  It is game on for the post-COVID sectors and a global economic recovery.  When you see an earnings report that is down -90% year over year in earnings and the stock of that company goes up 5% on the day, you know the bad news is fully priced in.  We have seen more than a few of those in the last month.  Do not overthink things, play the recovery by digging deep into value and cyclicals.   

This is a great time for investors who know where to look for deals and opportunities while avoiding yesterday’s winners like growth and technology. 

Thanks for reading! 

 

Cheers 

 

Sam Jones 

There are times when we hear the same series of questions from clients during our review process.  I thought this might be a great moment for an old-fashioned Q and A session so everyone can benefit.  Buckle up for a speed round. 

 

Question:  Do you own GameStop or any of “Those” types of companies in our portfolios? 

Answer:  Of course not 

 

Question:  What is really happening with the whole GameStop thing? 

Answer:  Too many retail investors with too much free money and free time on their hands blindly following a few social media celebrities.  This is NOT a David and Goliath story.  This is not about the people versus the machine or a financial coup or an effort to “stick it to the man”.  This is the same old story of people trying to get rich quick, people who know nothing mostly.  One of the great harbingers of the top of every bull market cycle in history is the strong presence of retail investors chasing what seems like easy money.  The phenomenon is very sad and very well documented over time.  This is a highly scientific chart of the cycle of investors and when they show up (nod to Jared Dillian of The Daily Dirtnap 😊) 

 

Question:  How long can the market go up like this? 

Answer:  The question is predicated on the belief that stock prices and the state of economy, fundamentals seem grossly out of sync.  This has happened before, especially during 1999 through the first quarter of 2000 and then the great bull market of nearly two decades ended abruptly.  We may be repeating the past with this rally as market conditions and price action is giving me some daily De’ Ja Vu.  These lockout, runaway rallies are capitulation events of sorts on the buy-side when investors finally develop enough confidence to deploy some of their huge cash savings.  FOMO (Fear of Missing Out) is driving prices, not much else.  How long can this go on?  For longer than you think possible, especially with a continuation of the $Trillion stimulus packages and all the cash sitting on the sidelines as well as massive underperforming bond assets.  Stimulus at this point is going right into stock and commodity asset price inflation, soon to be main street inflation. It can also end at any time seemingly without reason.   These are great times for investors but remember that making money during these periods is easy, keeping it on the other side is where we show real skill.  Our advice; keep both hands on the wheel right here, right now.   

 

Question:  Is Janet Yellen (new Treasury Secretary) going to be good for the stock market? 

Answer:  Yes, at first,  but too much easy money and her ultra–dovish stance regarding the purpose of the US Treasury will create very predictable problems with currency debasement, inflation, and some reckless behavior.  It is already happening (i.e., GameStop, Real Estate prices, parabolic rise in the price of worthless companies coming to market as IPOs).

 

Question:  Is it too late to invest new money now? 

Answer:  It is never too late to invest new money as personal conditions allow.  You need to remember a few things.  The stock markets of the world and corresponding index investments just represent a basket of stocks.  Many of these are wildly overvalued and one could easily point to plenty of evidence that the market as a whole,  has entered another bubble.  However, within that same market, there is value and securities trading at deep discounts.  There is a real opportunity if you know where to look.  We discussed this at length in our 2021 Themes Webcast last week (view recording here )  This is a time to be very selective about what you own, revisit your predetermined asset allocation, rebalance as necessary, and consider owning some non-traditional asset classes.  I could build an entire portfolio of investments with upside opportunities that have no correlation to the S&P 500.  Actually, that is what we’re doing inside our managed accounts now.  So yes, please invest, do so as you can financially, but simultaneously make sure your money is allocated where opportunity exists and avoid chasing yesterdays’ returns. 

 

Question:  Is Joe Biden going to raise taxes 

Answer:  Most likely in many forms but not without congressional approval.  Tax changes will be aimed at high earners, owners of assets, and investments if he follows the playbook.  This is a great time to review your taxable exposure to capital gains, income, and dividends.  We can help! 

 

Question:  How is Will going to help us with Financial Planning?  What is Financial Planning anyway? 

Answer:  Great Question!  Will Brennan is our new Certified Financial Planner and Lead Advisor.  Will is formalizing our financial planning offering to our clients in several ways.  First, Will is a data gatherer.  Having now met with at least a dozen households, one of the first things Will does is review what information we have on our clients’ entire financial picture.  Then he works to fill in the gaps with things like last years’ tax returns, discussions about the very purpose of money in your life, discover if there are any problems with your beneficiary designations, looks at your gross incomes from multiple sources, your debt, and your spending behavior, gets copies of your wills, trust, or estate plans, etc.  Finally, Will enters all information into E-Money, our newest comprehensive financial planning software platform, and builds projections for the rest of your life factoring in Inflation, investment returns, assets, income, withdrawals, and a ton of other variables.  This is not a one and done thing but rather the birth of a live profile that will evolve over time and be updated regularly when we meet for reviews. Also, Will has built the financial planning shell with our current client information for about half of our entire client base in his first two weeks.  When you first meet with Will, you will be surprised at how much he already knows about you but he will want to know more.  The formality of conducting an actual financial plan for our clients is something we have not executed well in all honesty.  We want to be able to give you solid, empirical answers and advice like how much you will need to retire in order to carry on with your current living standards for instance.  Up to now, our planning process has been lacking.  Now we have the right person with the right approach and tools to make it happen with confidence.  You will be impressed. 

 

Question:  Are things still crazy or am I just getting crazy? 

Answer:  Probably a little of both.  We all need to get beyond COVID.

 

That’s it for this week.  Hope we answered some of your collective questions. 

 

Sincerely 

 

Sam Jones 

On January 20th, we will be hosting our annual Investment Themes Solution Series for clients and interested parties. Sadly, it will be a webcast via zoom but we do look forward to the summer when we hope to meet again in person in our office. Over the next week, you will hear and see investment forecasts from nearly every financial publication out there. This is not our forecast nor will you hear much of that in our webcast. Instead, we simply want to point to themes as they happen, trends as they unfold, and leadership as it becomes apparent. We will leave the highly sensational and regularly inaccurate forecasting to others.

The Big Three

Regular readers know the Big Three investment themes we have been talking about since 2018. These themes have been packaged in the context of developing opportunities, relative values, and now current trends. The Big Three are as follows:

1. Internationals (esp. Emerging Markets) Outperforming the US stock market
2. Commodities, Inflation Hedges and Gold (or dollar alternatives) establishing new bull markets
3. Value styles outperforming Growth styles

We are going to talk in more depth about these themes, how we are positioned accordingly and some of the realities of owning this new mix of securities in terms of expected risk and return metrics, in our upcoming webcast. But for now, we thought we would close 2020 by announcing boldly that these new trends are now firmly in place. Investors who wish to continue making money in 2021, should be actively reallocating now. For today, we will give a little teaser of what we are seeing before the webcast.

Internationals Winning

Let us be clear that investing out of the US is not an act of treason. We are a global financial ecosystem where all countries remain highly dependent on international trade and we should look for investment opportunities globally, always. Here’s a little fact; The percentage of revenue derived from non-US countries across all S&P 500 companies, still sits at 42% (down from 43% in 2016). Let’s call that no change. To some degree, our global financial markets have been moving more and more in sync with each other as central banks across the world tend to work in unison both in method, magnitude, and timing. The opportunity overseas from an investment perspective is based purely on valuation differences. Take a look at GMO Q3, 7- Year assessment of expected returns across the largest asset classes.

Two things should pop out to you. One is that almost every asset class has an expected negative return over the course of the next seven years. The traditional 60/40 (US stocks/ US bonds) is obviously in trouble looking forward. Second, you see the one standout as Emerging Value. We have spent a lot of time and research looking into this space and it is a bit complicated but an investible slice of the market. Our clients can look at their holdings and find those positions easily. Examples might be international producers of commodities, energy or raw materials, Emerging Market banks and financials, and International small caps and high dividend payers. These are not things found in your everyday investment portfolio. Today, All Season clients have anchor positions here and we will take them to overweight in the coming months. Also noteworthy is the large green negative bar on the left representing large-cap US stocks. This segment now offers the worst return prospects of any asset class in the world. Large-cap US stocks are where all investors have their money now on a scale and concentration that we have never seen before. What a great time to sell US large caps and buy Emerging Market Value! It won’t happen but now we can say we told you so down the road.

Commodities, Inflation Hedges and Gold

We come at this one with a little more hesitancy until we see more evidence but current trends are becoming more pronounced. For this theme, we generally need inflation or the threat of inflation to be real for this side of the market to really be productive. Much of what drives trends in inflation comes from Federal Reserve policies and the current position of interest rates. Specifically, if the Federal Reserve is maintaining a proper interest rate policy, then short term interest rates would roughly match the current rate of inflation in the system. Today, short-term interest rates are BELOW the rate of inflation which means that “Real interest rates” are negative. Gold loves this environment because it forces the value of the US dollar lower. The dollar made a 24-month new low this week. Commodities and other inflation hedges, including energy, commodity producers, and basic materials companies are all simply reflecting the current RISE in inflation. Yes, this is a fact. Inflation is on the rise now and has been since the summer. We believe the risk of high inflation is understated and misunderstood considering where we are in the pandemic cycle. Some think we are going to be trapped inside for years. We believe COVID-19 will be a bad memory by August and demand for goods and services will swamp supplies with “too many dollars chasing too few goods” (defn of inflation).

 

Next fall you will see the NFL playing in front of live fans in packed stadiums. You will also pay $27 for a hamburger at the stadium so sneak in some snacks. Again, All Season clients can look at their holdings and find entry-level positions in commodities, gold, and heavier exposure to basic materials. To be sure, owning commodities long term is not recommended. This is and always will be, a tactical allocation for us but one that we feel could be worth the trade in 2021.

Value > Growth

Investing in value is almost becoming a consensus view in the financial media now so that worries me. But in this case, I am not going contrarian because the value/ growth cycle is very, very long and we are just making the turn now. Today we are probably witnessing a peak in the relative strength of growth companies with new leadership emerging clearly and regularly from the value side of the market. We have seen this before, notably in 1999, just before the bear market and just before value took off to the upside for years. You can see the high point in late 1999 marked on the chart below, the same position today.

 

But since September, things have changed. Mega cap technology has dramatically underperformed. Facebook is down -8.5% since Sept, Netflix is down -4%, Microsoft down -3%, Amazon down nearly -6% for example. Meanwhile, the Dogs of the Dow (the worst performers of the last 12 months the deepest value components) are up handsomely with little to no price volatility. We own many of the “Dogs” in our Worldwide Sectors model. For example, since early September, Dow Inc (DOW) is up +12%, Goldman Sachs (GS) is up 23%, Walgreens Boots (WBA) is up 15%, JP Morgan (JPM) up 26%, GE (GE) up 76%, Boeing (BA) up 37%. We own all of these in full disclosure.

Investors struggle to let go of the past especially when the past has been so good to them. US large-cap growth has been good to all but now it is time to let go or at the very least, trim your position size and reinvest in value. These new regimes in value versus growth in the last years.

We will leave it there as our last Red Sky Report for 2020. It has been a wild ride but we are very pleased with year-end results across the board. We want to take this opportunity to also say thank you to all of our clients for allowing us to serve you. We know you have choices and we are always grateful for your continued trust and confidence in our firm. We look forward to working with you all in 2021 and introducing our newest Lead Advisor who is a Certified Financial Planner and Chartered Financial Analyst to our team of professionals.

 

Cheers, Happy New Year, and best of luck to us all in 2021

 

Sam Jones

President, All Season Financial Advisors

 

Strategy Spotlight – Multi Asset Income (MASS Income) 

I teach a capstone class at our local high school for a select group of seniors who are interested in finance, markets, and business.  It is called Finding Benjamin.  One of our tasks as a class was to create a podcast for young investors, delivered by young investors with guidance from an old fart in the industry (yours truly). The Podcast is also called Finding Benjamin, available on Sound Cloud, Apple Podcast, and Spotify  https://allseasonfunds.libsyn.com/. We started the class last September introducing the most powerful force in the financial world, Compounding Interest.  Our MASS Income strategy is our latest greatest creation born during a very rich pricing opportunity while grounded in the roots of compound interest. 

 

Compound Interest 101 

Why would anyone on their right mind start a blog post with a math formula? 

Anyway… 

By Definition: 

Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest. 

For the math geek it looks like this: 

	A =	final amount
	P =	initial principal balance
	r =	interest rate
	n =	number of times interest applied per time period
	t =	number of time periods elapsed

Any investment strategy that generates frequent high interest or dividends, reinvests those yields, and grows principal at the same time is going to be very productive.  Easier said than done of course, but this is the root goal of MASS Income! 

 

 

What is the MASS Income Investment Strategy? 

Like all of our strategies, MASS income is an entire portfolio of investments selected through a well–defined process, based on solid research, and focused on a unique edge in generating high risk adjusted returns.  Phew!  That is a mouthful.  Let me start with the portfolio holdings.  

MASS Income attempts to remain fully invested in most markets keeping cash to a minimum.  There will be times when we raise cash but only under very poor market conditions for stocks.  The idea is to stay largely invested to generate high income by way of stock dividends and bond interest. 

Holdings include REITS, Preferred securities, high yield credit, floating rate funds, bank loans, convertible securities, master limited partnership ETFs, and dividend paying stocks.  We have preference for things that pay income monthly and dividends quarterly.  We also work hard to identify securities with very high probability of continuing payments as well as those that are priced attractively, discounted in some way or below par.  Securities are upgraded when there is new risk of dividend cuts or when yields fall to unattractive levels.  The current asset allocation pie chart is shown below.  Alternatives are REITs predominantly and yes we are currently carrying a high cash (money market) position as we are doing some tax loss harvesting and upgrading several positions as we come into year end. 

 

 

  

Why Are We Excited About MASS Income? 

Several reasons.  First, all of our investment strategies offer investors something unique, something edgy and something risk managed.  MASS income fits the mold.  We are investing in a segment of the financial markets that is not widely owned, does not get a lot of press and yet offers one of the highest yields out there.  Second, looking forward over the next 24-36 months, we believe the economy is heading into a sudden street fight with inflation and MASS Income is positioned to take advantage.  Actually, we aren’t fighting inflation at all but rather welcoming it, beckoning it, hoping for it!  We would say, be careful what you wish for.  Inflation is not a good thing for most investors.  However, REITS, hard assets, MLPs, preferred securities and stock dividend payers tend to be some of the best performers during periods of inflation while traditional bonds and growth stocks suffer.  Third, MASS income is already showing its true colors as a strategy with very low correlation to the US stock market.  It marches to its own beat.  Given the fact that the US stock market is now fully valued and quite possibly the most overvalued relative to earnings in the last 100 years, we like strategies that have low correlation.  Finally, MASS income is tax efficient as the strategy is designed to hold securities in excess of 12 months seeking long term cap gains.  Furthermore, most dividends coming off securities are “qualified” meaning they are also taxed at long term cap gains rates.  Of course, nothing beats the tax efficiency of a retirement account, but this strategy is also tax efficient for your taxable account registrations.  

  

How Does This Fit into Your Portfolio? 

Great question.  Without offering any specific advice on this public platform, I will say that MASS Income is a great alternative to any stock strategy.  MASS Income should not be confused with a bond strategy.  It has stock market risk without a doubt, but the high dividends and income buffer downside losses and keep your money productive during corrections.  As they say in the industry, “with dividend strategies, you are paid to wait”.   MASS income is also appropriate for households looking for higher income than anything available in the bond world.  The current annual estimated yield on the MASS income portfolio through yesterday is 6.52%.  Beyond the dividends and Income, we believe there is significant growth potential as well.  YTD, the strategy is up over 24% total return since inception in April, net of all fees.  Please see our composite performance disclosures.    One could make the case that MASS Income deserves some of your “bond” money but you need to expect much higher volatility in order to generate those higher returns (as usual).  Some of your bond money?  Maybe? 

 

Why is the Timing Right for MASS Income? 

Beyond all the timing issues discussed above, we must highlight the valuations of our core holdings which are far below intrinsic value of the underlying holdings and far below the over all US stock market valuations.  REITS for instance have been slaughtered in 2020 – thus the opportunity!   I have heard every reason why REITS will never recover, why COVID has changed the landscape of the office work, the mall shopper and hotel visitor forever.  We would say bunk!  In July and August of this year, you will see a great explosion of consumer behavior back to the way things were pre-COVID.  Today, we are only lightly invested in REITS that own Malls or Leisure (We have a whopping 2% investment in Simon Property Group for instance).  But that space is already catching the eye of Wall Street.  This article just hit the headlines this AM from the WSJ; 

https://www.wsj.com/articles/real-estates-biggest-losers-enjoy-a-one-month-bounce-11608028201 

MASS Income is a post COVID trade very specifically.  We are building our exposure to a segment of the market that has been left for dead.  Today we will stick with the safety trades in Apartments, industrials space, storage until, 5G network towers, etc.   Later in 2021, we will be in the retail, leisure, hotel space.  The timing of initiating an investment in MASS Income is right despite the consensus blather on the street.  As Jared Dillian of the Daily Dirtnap (one my favs) likes to say – Do the trade that gets you laughed off the set at CNB.   

 

Personal Note: I am eating my own dog food here.  Rarely do I make strategy changes with my own assets.  This year, I have transitioned a significant portion of my investable capital into MASS Income from cash and other strategies.  I believe! 

We hope you have enjoyed this Strategy Spotlight, stay tuned as we roll into our 2021 Investment Forecasts. 

 

Sincerely, 

 

Sam Jones 

President All Season Financial Advisors Inc. 

 

Strategy Spotlight – 2020 Top Performing Strategy (again) – New Power

 

As we approach the end of 2020, we would like to take this opportunity to review our top performing strategy of the year (and for the last 5 and 10 years!) – The New Power Fund.

 

New Power Fund – Our High Growth Impact Investing Strategy

 

First, please allow us a little performance-based cheerleading.  As of the end of November, the New Power strategy is up 68% YTD net of all fees.  That is not a typo.  More impressively, New Power only lost -18% from the first of the year through the final Covid lows on March 23^rd, compared to a loss of -30% for the S&P 500.  Most growth strategies/ funds/ ETFS tend to experience larger losses compared to the broad market (S&P 500) during corrections and bear markets.  But unlike most growth strategies, the simple relative strength process behind security selection in the New Power Fund, does a great job of staying out of trouble during challenging markets.   It is difficult to find any diversified investment offering with that return stream in 2020, to be frank.

 

Is this a single year phenomenon?  No

 

Time Period (ending 11/30/2020)                     New Power                 

12 month return                                               +77.42%

3 year average annual                                       +19.77%

5 year average annual                                       +15.20%

10 year average annual                                     +11.28%

 

New Power is no stranger to our strategy spotlight updates over the course of the last seven years.  Regular readers now that New Power is our high growth, Impact Investing portfolio meaning we limit the underlying investments to those sectors and stocks that are making change for good.  These companies often challenge incumbent players in their own industries.  All the investments in the New Power Fund are driving the needle toward positive environmental, social and economic change while avoiding those with negative external costs to society.  That is Impact Investing!  Please take a moment to read all about the ideology behind impact investing at established goals for New Power.

https://allseasonfunds.com/impact-investing/

Obvious examples are renewable energy, electric vehicles, battery technologies, 5G infrastructure, Clean Air and Water, Methane recapture, on-line Real estate companies, automation, digital currencies and payment systems, 3-D Printing, and Internet of Things (IOT).

 

2020 has been an incredible year of opportunity for investment programs that have the freedom to follow new leadership in stocks and take advantage of the explosive trends occurring in nearly every sector.  Renewable energy investments have been the most surprising to us.  Who would have guessed that solar stocks would average almost 50%/ year since the election of Donald Trump, despite newly imposed solar tariffs and despite the ever-lower price of competing fossil fuel generated electricity?  Renewable energy and the electrification of transportation represent a solid 40% of total assets in New Power.  Also, surprisingly, we don’t own a single share of Tesla, but we do own all the battery, lithium and automated driving technologies behind electric vehicles- at much more reasonable valuations.

 

Other winners in New Power include digital payment systems, cyber security, block chain technologies, genomics, five G technologies and even a little Bitcoin.  We have had a few frustrations as well including repeat and failing efforts to invest in on-line learning and organic foods.  We thought both would be slam dunks during COVID but haven’t found either sector to be very productive.  We will keep them on the radar for another time.  Our only position currently held at a mild loss is Beyond Meat (BYND) which we admittedly bought late.  We are holding Beyond Meat and remain shamelessly bullish on the name.  We will probably increase our position size before long.

 

There are still plenty of high growth opportunities as we look ahead into 2021, despite our wildly overvalued broad market condition today.  New on our watch list but not yet full engaged are some of the new players in Hydrogen based fuels and associated technologies, especially for larger trucks and commercial fleets.  We would also love to get exposure to the incredible growth in charging stations but most of those companies remain private to date.  Also, on our radar are continuing investments in the shared economy sectors as we eagerly await the IPO of Air Bnb.  The timing could not be better as a post Covid trade.

The point of all this detail is to give you an idea of the types of companies, breadth of scope and general orientation of the New Power Fund investment strategy.  This strategy is not for the investor who is intolerant of 15-20% declines at least annually.  This IS a program for any investor who want to allocate their investment capital to next generation of high growth companies who are making the world a better place, environmentally, socially and economically speaking.  Our firm remains focused and committed to risk management for our clients.  But risk management is a dial, not a switch.    The New Power Fund is still risk managed but individual investments are clearly more speculative and high growth in nature.  If you would like to have a conversation about potential exposure to this strategy, we are happy to have that conversation.

 

Please stay tuned next week in our next Strategy Spotlight as we review our newest strategy, Multi – Asset Income (aka MASS Income).  As we investigate 2021, we see a landscape of inflation, tougher broad stock market conditions and a clear shortage of real income options for investors.  MASS Income is designed exactly for that environment and could be one of our best performers.

Happy Holidays to everyone,

 

Sam Jones

President, All Season Financial Advisors

The Next 24 Months Will Make AND Break Investors

With few exceptions, almost every asset manager on earth has struggled to keep up with the S&P 500 over the last 5-6 years.   But the tide has turned.  Index strategies are now lagging, active managers are putting up some very nice returns and we’re thrilled to be back in the driver’s seat.  This is happening as it does historically, during recessions and when bull markets come to an end.

The Big Picture – Still in Recession with Stocks Carving Out a Long-Term Top    

Regular readers know that we are still operating on the thesis that the US stock market is carving out a significant bull market top.  This process, and it’s always a long and painful process, began in January of 2018.  The growth rate of the US economy peaked in the fourth quarter of 2018 at 3.2%, fell to 2.3% by the end of 2019 and finally went negative in the spring of 2020 (recession).  Today the US economy is still in recession on a year over year basis (-2.3%)!  From the stock market’s perspective MOST of the conditions that precede major tops have also been developing since 2018, including the absurd concentration of gains among a few tech stocks (FAANG) pushing the technology weighting in the S&P 500 to an extreme of 26%.  We have also witnessed two mini bear markets in 2018 and again in March of 2020 illustrating clearly that prices are not secure while gains are hard earned.  The Fed and the US Treasury department have been working overtime to support a paper economy built on short term stimulus via corporate tax cuts, and unprecedented monetary and fiscal stimulus.  The stock market has thus far, avoided a longer, more protracted bear market as a result.  From our technical perspective, one of the key conditions that has been missing in the topping process, until now, is unbridled speculation and frenzied buying of stocks.  Now we can add that to the pile of evidence.  More than a few times this week, I read or heard, that earnings and fundamentals don’t matter anymore.  After all, what value is a Price to Earnings ratio (P/E) when many stocks are trading over 1000 x 12-month trailing earnings (like Tesla which was unfortunately just added to the S&P 500).    Rampant speculation is probably the most pronounced hallmark of every major top in stocks.  Prices can continue higher but much depends on trends in COVID and the associate response from the Fed to reup their support for the economy.  Ultimately, like gravity, the current level of the US stock market and the current state of the US economy (earnings and fundamentals) need to reconcile as the gap between the two remains at an extreme.

 

As 2020 comes to a close, it seems somewhat obvious to us that trends are going to strongly favor those who can still make money away from the winners of the last several years.  We’re ready, willing and able.  We have provided our Game Plan for the Remainder of 2020  https://allseasonfunds.com/game-plan-for-the-remainder-of-2020/ to regular readers who are trying to do this themselves.  Have at it, but you’ve got to have the discipline to stick to the plan from here on out.  The next two years will have far fewer opportunities to make money but they do exist.  In the Bear market of 2000-2003, the S&P 500 lost a cumulative total of 46%.  Our strategies made money in each and every year of that bear market.  We see the same set up and believe we have the same potential with a clear path of what to own and what to avoid.    Here’s a chart of that bear market period (2000-2003) with the S&P 500 shown in Green and results of our flagship “All Season” Strategy, net of all fees, shown in Red (please review our composite performance disclosures).

Economy Getting Weaker Again

In the last several weeks, we have seen a slew of economic reports indicating that the US economy is getting weaker again after recovering nicely over the spring and summer.  Double Dip Recession headlines should not be confused with the reality that we never emerged from recession.  We are simply bouncing down a flight of stairs economically speaking.

So, the obvious question and cause for concern is this.  If we are in recession and economic conditions are now getting soft again, what in the heck is the stock market doing trading at all time new highs?

Great question!

Answer:  The stock market will likely retrace back to reflect actual economic conditions.  “Fair Value” on the S&P 500 is shockingly -42% lower than the close on Wednesday.  When does that start is anyone’s guess but January of 2021, would fit the historical pattern.

The Critical Takeaway

The US stock market in aggregate is very suddenly in an unstable condition both in place and time.  Prices and valuations have reached 100% on practically every measure.  Crescat Capital provided this very clear picture using their Equity Market Valuation model to illustrate how market valuations are literally at their fullest from a historical perspective looking back over 120 years.  Prices have almost never gone higher from here without a dramatic improvement in earnings or the economy.

 

Lots of Red on the right-hand column. Last time we were here were the previous major bull market tops marked by the yellow circles.

Many Opportunities to Continue Making Positive Returns

To finish on a positive note, we are wildly bullish on our own strategies.  We think our method, process, experience with bear markets and recognition of where risk and return live looking forward, present us with an incredible opportunity to outperform.  As we move into 2021, active, risk managers like All Season, are positions well to find new leadership, invest in non-traditional asset classes and continue making positive returns.  At the same time, we would strongly caution decision making based on past returns, especially those of the last 5 years.  We invest today for the future, not for what has happened in the past.  The next few years will look nothing like the last decade.  We’re glad you’re with us.  Please feel free to reach out to us if you have questions about any unmanaged, outside accounts, 401k plans, etc.  If you’re approaching retirement, I cannot think a better time to evaluate what you own and potentially reposition for the next cycle.  Please let us help you.

Limiting Our Total Households served to 250

After careful consideration, we have made the corporate decision to limit our total number of households that we serve to 250.  There are many reasons for this decision.  But most importantly, we want to stick with our business model of being a smaller, specialized wealth management firm serving higher net worth families with sophisticated asset management offering and cost-effective team of professionals in tax, estate and financial planning.  We are choosing to stay at a size that does not compromise our service offering or our ability to know you and your situation in detail.   This is who we are.  Today we serve 207 households and we want to serve the friends and family of our existing clients by preference.  If you have friends, associates or family who are need help and are interested in our joining our firm, our door is open, for now.

 

I hope everyone had a wonderful Thanksgiving in whatever form it happened!

 

Cheers

 

Sam Jones

President, All Season Financial Advisors, Inc.

 

Why So Many Investors are Losing Money in a Rising Market 

I can’t say that any of this is a surprise. Today, the side of the markets that have been left for dead, is up almost 20%. Meanwhile, the mass bulk of investor capital is exactly in the wrong place; in the sectors and asset classes that are beginning new downtrends. Investment portfolios need to be reallocated now. Move it or lose it as they say.

Game Plan Revisited 

In our last post entitled, the “Game Plan for the Remainder of 2020”, we covered the change in leadership and the likely surge coming from sectors that are grossly under-owned by investors.

Here’s the post if you want to read it again https://allseasonfunds.com/game-plan-for-the-remainder-of-2020/ 

I’ll provide a few highlights.

We suggested buying the Value side of the market like Financials, Energy, Commodity producers, cyclical stocks, REITs, MLPs, Emerging markets, companies that save you money. We recommended holding your inflation trades including Gold and other things that benefit from currency debasement.

We also suggested staying away from Facebook, AAPL, Netflix, Amazon, TSLA, and all the stocks that dominate every mutual fund, index, and investor portfolios. We recommended reducing Treasury bond exposure and all COVID trades.

Today, we wake up to our screens and we see a lot of dark red and a lot of bright green, all in the same day. These moves are exactly following the game plan outlined above. Take a look

This is a screenshot taking at 10:00 AM MST of the COVID stocks that everyone seems to think are bulletproof. Look through the list! You’ll also find Amazon, Costco, Netflix, FedEx, etc. Peloton is a fun thing to ride but I wouldn’t put a dime into that company. Even after their enormous blow out in earnings, the company is still showing 1-year trailing earnings of -$71M. Chewy? It’s pet food delivered. Why are investors in love with pet food? 12-month trailing earnings – $220M! No thanks. There was a time to own the COVID trades, but only as a trade. That time is past.

Now here’s a quick snapshot of the broad market winners for the day represented by ETFs. These aren’t even the individual stocks which are up much higher on the day.

Again, take a minute to actually walk down the list. You’ll see Energy in all forms, Banking, and financials, commodity producers, MLPs, REITs, internationals, small-cap value.

Our technical market system went on a “Buy Signal” on November 3rd. We took that opportunity to do a lot of buying in the sectors above. All households that have joined us recently and were waiting for a good entry point into the markets, were allocated on 11/4 and 11/5.

Now I want to tell you something that should get you excited.

There are only two things that make stocks go up over time. They are…

1.) The available money supply (aka cash available to invest)

2.) Investors’ willingness to deploy that cash.

Believe it or not, stock price action deviates from earnings wildly and for years on end. They are almost unrelated statistically.

Today we have over $21 Trillion sitting in cash (MZM) as measured by the Federal Reserve Bank of St. Louis.

So, we have a lot of “Available money”

Now, investors have a reason and a place to invest it. Please reread the Game Plan if you need to.

The point is that we could very easily see a robust move higher in the new leadership sectors and asset classes as investors across the globe begin to deploy any portion of the cash sitting in money markets. There is also a record amount of investment in Treasury Bonds which are near worthless and continue to lose ground. That money will also redirect to stocks once the downtrends become more pronounced.

So, this is an exciting moment for investors who are willing to embrace change. Unfortunately, old habits are hard to break and many investors will likely stick with the old leadership rather than taking profits and moving on.

One last thought

The markets and the economy march to a very well-defined pattern of cycles. They are related to each other but they typically operate out of sync in terms of timing. Understanding these cycles is our specialty and the very namesake of our firm, All Season Financial Advisors. Cycles are Seasons.

This is a theoretic model of how the financial markets move in relationship to economic conditions.

At the top of the graphic, you can identify which sectors should be leaders in the various stages of the economic and market cycle. Clearly based on the rotation in market leadership recently, we are moving quickly from the left side (Tech, consumer discretionary, communication service, and industrials) to the right side where Energy, materials, consumer staples, healthcare, utilities, and financials do best.

Often this change in leadership marks a “Market Top” in the broad stock market and the “full recovery” stage of the economy. So, while we’re excited about the prospects of new investment opportunities, we’re also acutely aware that the broad market, especially among large-cap indexes, may still be carving out a bigger top. Selection and timing are everything and investors need to get it right if they want to continue generating positive and consistent returns from here on out.

We are shamelessly bullish toward the prospects of our various investment strategies and our clients who are enjoying the new trends in leadership.

Happy Monday!

Sam Jones

 

Investment Game Plan for the Remainder of 2020

 

Last week’s market action was crazy, some of the most erratic behavior I’ve seen in years. It stands to good reason as investors are about to go over the battle wall of time and have no idea what to expect next. In a rare form of clarity for us, the game plan for the rest of the year and into 2021 actually seems pretty clear and we’re very excited about the opportunities and prospects developing. Wherever and whenever the current correction in stock prices ends, investors should be ready to jump into the buyers’ seat following this game plan.

 

The Economic and Market Landscape

 

With no doubt, making money in the markets from here is going to take a lot more skill, experience, and knowledge than any time in the last decade. As they say, don’t confuse brains with a bull market. The character and features of the bull market as we have known it since 2009 are on the cusp of changing dramatically. That doesn’t mean the bull is over but rather we shouldn’t expect it to persist in the same form. Today we usher in a new kind of market landscape. The new landscape will require quite a few changes for investors that aren’t going to be comfortable or familiar. Specifically, we’ve talked about the importance of reallocating to a “durable” portfolio which we’ve discussed many times in the last year. Generating consistent positive returns over the next several years will require you to own things that you don’t recognize or have never owned. Investors will have to get uncomfortable and accept higher volatility with their portfolio balances in order to make money by investing in assets that have naturally higher daily price swings. But make no mistake, we are staring squarely at some of the best investment opportunities we have seen since 2008. Wise investors will make money by embracing these new opportunities while those who are married to their past winners will grow more frustrated with persistent losses, hoping and pining for the way things used to be.

 

Side note – Most of what we offer in this update, has little to do with who wins the White House or congress. These themes are not political as much as inevitable outcomes from catalysts and trends that have developed over years of Democratic and Republican leadership.

 

There is too much to go over here to cover with normal journalistic writing. I’m going to break it down to bullets with a little commentary for easy digestion.

 

Investments with Big Opportunities

 

• Renewable energy – This sector has been on a tear for years under Trump and will only accelerate under Biden. This is a megatrend in its first phase.

 

• Infrastructure – Government spending on infrastructure is inevitable as our country is literally falling apart structurally.

 

• New Tech, not Old tech- FAANG investments are now very high-risk positions for investors. Lean into the new disrupters, Innovation, smaller tech companies with much higher growth potential.

 

• Equal weight not concentrate – Know what you own. The S&P 500 is now a proxy for Apple based on its capitalization-weighted construction. Instead, find funds or ETFs that offer equal weighting of underlying holdings (not price or capitalization-weighted).

 

• Orient toward inflation – This is now a thing. Sectors and asset classes that benefit from inflation should be on your buy list.

 

• Start building toward the Value side of the market. This is perhaps one of the greatest opportunities we see today. 2021 should be the kickoff of the long-awaited Value trade at the expense of growth. Start building your positions between now and year-end.

 

• Orient toward companies that save you money – This is the domain of stock pickers but leans into cost savers. Software is cheaper than people, Electric cars are cheaper to own than gas cars, healthcare technology can help you save! When inflation arrives in full color, these companies will thrive.

 

• Select REITs, MLPs, and other commodity producers paying high income are in a sweet spot now with very low prices, tons of value, and high dividends. Pick them up as they turn higher but be very selective. Understand what you own and why!

 

• Emerging Markets – Emerging markets and internationals may be taking over leadership from the US on a longer-term basis. A bottom in Commodities and natural resources plus a falling dollar, lower valuations, and higher growth make this one of our favorite themes for 2021 and beyond. Consider moving to 50/50 domestic to international holdings for your equities.

 

• Currency debasement – The US dollar is going to be under pressure for a long time. Own things that benefit from currency debasement like gold, silver, even cryptocurrencies in small bits.

 

Things to Avoid

 

• Bonds – almost all. We find nothing attractive about corporates, treasuries, or municipal bonds at these price and yield levels. Yields today do not square up with the risk of owning bonds at these prices especially as inflation continues to climb higher. We’ll scoop them up when they are more attractive later in 2021/22.

 

• Mega cap tech (FAANG stocks) – Could continue higher but there are much better opportunities with more attractive valuations, fewer headwinds, and lower competition.

 

• Passive Indexes – The 60 (stock)/ 40 (bond) portfolio is already unproductive. We will again respectfully urge any and all to evaluate the return potential of your standard 60/40 portfolio. The prospects for gains with this mix is almost zero until we see prices in both stocks and bonds fall dramatically and reset.

 

• Real Estate – This one is too tricky to call but generally we would be a seller, not a buyer, or builders. Price gains have been pulled forward by maybe 3-5 years and we see higher ownership costs looking forward (property taxes, utilities, home upgrades). Rising costs and lack of available building materials is going to be a challenge for builders and anyone trying to fix and flip. Rents in San Fran are down 23% already, commercial property is seeing some deep discounts. Residential may hold up based on short supply but we’re already seeing mortgage delinquencies rising. We don’t see much future opportunity here.

 

Time to Pay Attention to Taxes Again

 

Taxes are coming from every direction. The US is essentially bankrupt as a country and many states are not far behind. Taxes are going up regardless of who is in office. Trump cut taxes for corporations, but they had little effect on most taxpayers by eliminating deductions like SALT (state and local tax deductions). Republicans raise taxes by eliminating deductions. Democrats raise taxes by increasing the marginal tax rates but adding back deductions. Again, it doesn’t matter. Big government needs big tax revenue to stay solvent or face some very unsavory currency devaluation issues. Starting right now, every investor should evaluate where they are exposed to taxation (Income, cap gains, dividends, property, sales). After-tax investment results will be far different than tax-deferred investment results. Our team of tax strategists and tax-efficient investment strategies can help you find shelter.

 

This is the game plan for the rest of the year and probably well into 2021. As always, investors should follow actual price trends and manage their net exposure according to their personal capacity for risk and portfolio volatility. This is what we do for our clients adjusting and embracing new leadership as it unfolds. There is a lot of money that will be made and lost in the next 12-24 months. You need to be on the right side or find someone who can get you there.

 

Good luck to us all tomorrow and through this election cycle. I am voting for unity and cool minds.

 

Cheers

 

Sam Jones

 

In the last several months, we’ve delivered several important pieces of content for our clients to consider when setting expectations for their investments and making smart decisions. In this update, we’ll review those topics at a high level and finish with THE chart that brings it all together. Our hope is that you’ll begin to see the big picture of where our financial markets and economy stand today and where they are going in the future.

Review of Key Financial Market Realities

The Big Three

Regular readers know the big three as the themes we expect to see develop over the course of the next 12-24 months. These are in no particular order:

Value beginning to dominate Growth in the US

International and Emerging Markets outperforming the US stock markets

New bull markets in commodities (adding to the current bull market in Gold)

The mass of invested assets in the world are not invested in these themes … at all, quite the opposite.

Inflation Risk Rising

We covered this several times in several different venues including our most recent Solution Series Webcast. Drivers of higher inflation are firmly in place including an unprecedented increase in the money supply and a Federal Reserve who is committed to allowing high inflation. Once Energy begins rising from the ashes in 2021/2022 and we emerge into a post COVID world with high demand and low supply (also 2021/22), inflation is going to be very tough to contain. Interest rates may remain low but only by brute force of artificial caps on rates and other bad ideas by our central banks even while the real cost of living climbs 5-6-7% annually.

US Stock Market Valuations

Howard Marks who is arguably one of the best institutional investors of all time, delivered a sobering piece on expectations today about forward returns for the US stock market. Valuations are back to never ever land and we agree with Mr. Marks that opportunities and returns will not be found in the same place nor the same magnitude as the last decade. 

The Gap Between the Financial Markets and the Economy

This topic was covered in one of our podcasts in the spring and seems to be one of the greatest points of confusion out there today. Our podcast revealed how Federal stimulus in the $Trillions alone has driven stocks back to current levels while the majority of the real economy, earnings, and unemployment remain in deep recessionary levels. Yes, things are recovering and yes, some sectors are even beneficiaries of COVID, but make no mistake, GDP in the US is -9% as of the end of the last quarter. Stocks trading at all-time highs in this environment is a clear testament to the impact of, and our dependence on, continued and unconstrained government spending and cash infusions. What could go wrong?

The Only Chart That Really Matters

If you’re an investor, you need to understand the environment in which you are operating. Risks of loss and bear market are always there. Sometimes the risks are low, and we can be more aggressive giving our positions a long leash and expecting positive resolutions. Other times risks of loss become very pronounced and we should be quick to cut exposure, follow stops, and know where we are going with our money to preserve capital. The chart below was created by Jason Goepfert of Sentiment Trader looking back to the early ’60s. It’s not a new chart or anything you haven’t seen before. In fact, Buffett refers to this regularly when setting context with his own Berkshire Hathaway investors. This is a chart of the S&P 500 as a proxy for all US equities shown as a percent of Gross Domestic Product.

 

 

Let’s unpack this to really understand what this means. Ok, the top black line is the value of US Equities (SPX). The grey vertical bars are periods when the US economy is in recession. The right side of the chart will soon show a thin grey bar in 2020 as we have clearly been in recession since March. The blue line is the equity markets as a percentage of GDP which has very recently done something it has never done. The blue line hit 1 or the equivalent of 100% of GDP.

Economic historians and students of market history know that rarely do financial markets reach this zenith of valuation relative to the broad state of the economy. More typically we operate within a condition where equities in aggregate represent 70% of GDP on the high side (Red line) or 40% on the low side (green line).

You’ll notice that we have been above the red line a few times in the post-WWII world. Equities were above 70% of GDP for most of the ’60s but market people know that the US stock market actually peaked in 1965 and didn’t make a new high until 1982. What happened during that period? Massive inflation! Hmmmm, the plot thickens. By 1982 as you can see in the chart, equity valuations had dropped close to 20% of the current GDP as stock prices chopped through a series of rolling bear markets.

Then, after nearly 20 years of a raging bull, by the year 2000, stock prices had again pushed out beyond the 70% of GDP mark with the dot.com bubble. But again, prices didn’t stay there for long and it took 13 years for the US stock market to make another sustained new high.

Here’s the disturbing part. Since 2015, equity valuations have remained above 70% of GDP and have just recently pushed to the highest level in US history (as a percent of GDP). What we must all understand is that the financial markets have been unhinged from the real economy for the last 5 years. It has done so on the back of some impressive financial engineering, massive corporate share buybacks, and yes, our own Fed serially supporting stock prices with Federal stimulus and easy monetary policy. In the end, we are left with an equity market that looks at the economy, GDP, and earnings as just a distant, second cousin and not really close family. Are we even related?

History will prove that equities cannot unhinge from GDP like this indefinitely and we are already long overdue for a lengthy period of time when equities fall back into the reasonable range or even a true historic discount to GDP. An inflationary period with a falling US dollar, rising commodities, and rising interest rates would get us there. A period where the growth side of the market weighs down the likes of the S&P 500 while Value finds new leadership would get us there. A long period where internationals take market share from global investors would get us there. This is what we have been talking about for months.

What’s the point?

Once again, this update offers a constructive reminder to all investors who may be too confident in the future of their index-based investments like a Vanguard S&P 500 fund. To own an index now, passively, you’ve got to understand the historical context of where equities sit now as a percent of GDP. You’ve got to be clear and honest with yourself about the prospects of returns looking forward with this strategy. As the chart indicates clearly, the prospects are thin with plenty of downside in the years to come for the likes of the S&P 500. There will be a time to load up on a market index and just sit on it. This is not that time.

Conversely, we feel strongly with high conviction that this is not a time to be passive with index investing, but rather a time to embrace unconventional active investment strategies, those with the will and capacity to own new market leadership that could benefit from an inflationary environment. As we draw closer to 2021/22, you should be clear about your risk management strategy, check your brake pads, and know exactly where to find the exit door. This is the time to review your holdings and position sizes, maybe take some profits, rebalance, reach for higher-yielding/ low price securities as they start trending up, and avoid chasing yesterday’s winner that trade at obscene multiples. Make no mistake, this is that time.

As always, we’re here to help including reviewing any outside accounts where we can run your holdings through our Riskalyze software. We can show you where you are exposed to market risk, run simulations against different market environments, highlight your true sector weightings, look at tax-loss harvesting /etc. We’re here to help, just ask.

Sincerely,

Sam Jones

 

Queue the Election Correction!

Well for everyone who is surprised by the market’s decline over the last month, I can only say, you’re probably not paying close enough attention to our communications.  This is all following a script (ours) that was laid out this summer so no surprise from our end.  Obviously, we’re not done yet as I watch the S&P 500 close down another -2.5% today. Rest assured, we have made defensive changes to our risk-managed strategies and we’re in great shape to take advantage of the next great buying opportunities with our emotional capital and your physical capital intact.

In our August 18th Red Sky Report “It’s Time” https://allseasonfunds.com/its-time/, we talked about the frenzied price gains in just a few names, artificially propping up the rest of the market which was already headed south.  We said, “it’s time” to start taking profits, especially in those names that everyone knows and loves (FAANG stocks + Microsoft).  Later, in September, we recorded a well-attended Solution Series webcast offering recommendations to those who owned big shares of large-cap tech, reviewing the various tax-efficient options for limiting downside risk and capturing some gains.  You can watch that video here. https://allseasonfunds.com/do-you-have-enormous-gains-in-a-certain-stock-what-should-you-be-doing-now/

This is not one of those loathsome I-told-you-so blog posts.  It is simply a note to our clients that we have been prepared for the current correction and getting defensive since mid-August.  We are humbly giving you some peace of mind as the markets are in that place where accidents do happen.  All is well on our end and these are some highlights of how we are positioned now.

• We have taken profits in nearly all growth-oriented and technology holdings.
• We are sitting on roughly 25% cash and money markets with recent sales.
• We added short positions last week to our strategies (these make money when the markets go down).
• We still own a small position in the VXX ETF which benefits from higher. market volatility. Plenty of that now and probably more to come.
• We have sold all high yield corporate bonds and emerging market bond positions in our diversified programs.
• We are holding our position in value, commodities, and emerging markets which continue to hold up well (more on this in a minute).
• We have taken a new position in the rising US dollar fund which tends to rise when stocks fall.
• We own no Treasury bonds outside of TIPS (Treasury Inflation-Protected Bonds) because Treasuries are dead money… for the next decade or two.
• We reduced our Gold and Silver positions today.

So that’s defensive for any investment portfolio without completely disengaging from the markets.

Let’s talk about elections for a minute before focusing this discussion on where we might look for the next giant return opportunities on the other side of this mess.

Election Correction – Open Your Mind

I don’t know of a rational (or healthy) person who would step in front of a fast-moving freight train.  The pending presidential election is a freight train of chaos.  Never has our country been so divided politically, economically, and socially.  The last time we had this level of social unrest and anger in the streets, there was a bad guy that lived in Vietnam.  You were either for the war or against it in the late ’60s.  This time, we are at war with ourselves with the added drama of a global pandemic to keep us distracted.  Whether you’re an investor, a company owner, or even just your everyday consumer, you are not likely to go out on a limb with anything that falls into the discretionary category.  You are not going to buy stocks aggressively 40 days away from the most important election of modern life.  Companies are not going to embark on new spending plans, or any M& A activity until they have some vision into the future.  IPOs will be put on hold, same for big purchases at the consumer level until we see and feel some sense of calm.  Today and for the next 40 days, there will be anything but calm.  Buckle up and expect more volatility in every aspect of your life.   On the other side, we’ll see how the markets and the economy reacts and then we can all make more educated decisions.  With that said, we would strictly avoid any preconceived notions of what the markets will do after the elections depending on the outcome.  Every investor who hated Donald Trump in 2016 probably struggled to watch the markets climb nearly 40% out of the election lows.  Events just did not jive with their perception of what “should” happen.  This round, we hear that if Biden is elected, we should expect stocks to fall into a deep depression.  Smart investors will remove their political hats and show up as objective investors ready to follow trends as they unfold without hating or loving the reality. Open your mind to any outcome.  If you are an emotional person by nature with strong convictions about politics, you’re probably not going to have a very pleasant investing experience looking forward.

Three Opportunities – Revisited

You know the big three, but I’m going to take this opportunity to say them again just for the record.  In the next 24 months, it is highly likely that we will see the following three dramatic changes in the markets, creating both pain for those who don’t know what they are doing and reward for those who are aware.  Regular readers know what I’m going to say but here they are again in brief with a few supporting graphics.

1. Inflation is coming

I know, I know everyone says it will never happen which is why it will happen this time.  I’ll give you one chart that offers the most compelling reason why we should all expect some form of inflation, perhaps very high inflation in the next couple of years.

Do you see anything strange on the right side of the chart?  Yes, the money supply means everything as one of the key drivers of future inflation.  This is terrifying.  Gold and Silver tend to lead inflation and they have been the best performing asset class for the last two years.  Now leadership in Gold and Silver may be coming to an end as actual inflation finds its way into the economy leading us to invest more in broad-based commodities.  It’s still early but take a look at the price of wood, copper, food, etc.  When energy bottoms on the other side of elections and COVID, inflation will really become pronounced.  Unfortunately, the Fed has now verbally boxed themselves into not fighting inflation until it’s really out of control.  There are lots of ways to make money during inflationary times.  Our next Webcast Solution Series will cover the topic of Inflation and how to position yourself on October 7th.  Please RSVP soon on our Solution Series page  https://allseasonfunds.com/videos/

2. Value will Outperform Growth

Usually, this happens after bear markets have begun in the global markets and it’s hard to say if we’re in a bear market yet or not.  Sometimes Value outperforms growth by simply losing less.  Sometimes,  Value actually makes money while growth loses money as it did for the first three years of the 2000s.  Today, I’m shaking my head at the craziness in the growth side of the markets.  Companies with triple-digit P/E ratios were raging higher (until two weeks ago).  Now they are very suddenly down 20-30%.  Tesla lost almost 11% today for instance.  We have no hatred for Tesla; It is a great company with extraordinary vision and promise.  But we don’t like Tesla at this price and will buy it back lower, maybe much lower.  Meanwhile, the likes of Caterpillar, 3M, Dow Inc,  Intel, Verizon, Honeywell,  are starting to attract really buy-side interest for the first time in years and are trading well below the broad market valuations found in the S&P 500.  Interestingly, 20 of the 30 stocks found in the Dow Jones Industrial Average are now outperforming the tech-heavy S&P 500 over the last 30 days.  One could simply own the Dow Jones 30 index as we do to get easy exposure to Value.  Investors who have been at this longer than the last 10 years know that growth and value often change roles as market leaders.  Might we be on the cusp of the 10-year rotation?

3. Emerging Markets Will Outperform the US markets.

The valuation argument is undeniable regardless of how much you might love the US.  Emerging markets might be the last place on earth with attractive valuations in aggregate.  They have lagged for the last several years at the index level as you can see from the chart below but I will say that we’re seeing select managers in the ancient, left for dead, mutual fund space, doing incredibly well.  We have taken a few positions in the Fidelity Emerging Markets, Southeast Asia, and Small Cap Japan funds in our “Worldwide Sectors” strategy.  All three are crushing their index benchmarks and we hope to hold these outperformers for years.

Again, once uncertainty regarding elections and COVID begins to subside, there is a very good chance that emerging markets will dramatically lead the US markets.

I’ll leave things there for now.  The message for today is that we are in a good spot managing downside risks in all strategies and will be ready to jump on the next set of opportunities as they unfold over the course of the next 12-24 months.  Stay tuned to our communications in all forms and thanks for listening.  Feel free to share any of our content with friends, family, or workmates at your discretion.

Sam Jones

 

We are constantly looking for ways to diversify portfolios—non-correlated investment strategies or investments that move differently from stocks, etc.

It is a constant battle.

While diversification has not been needed in the last several years—in fact, it has been punitive—there are times where it sure comes in handy. 2008-2009 comes to mind …

It is not often that an asset comes onto the scene that not only offers diversification but also provides the chance for fantastic growth. What—pray to tell—could offer such wild and fanciful benefits?

The answer: Bitcoin.

Bitcoin is an interesting cross-section between technology, currency, and a store of value. Most believe it is one of those three things. Some believe it is a “category killer” for all three. Personally, I believe the book is open on that score.

Bitcoin—and other digital tokens/coins/currencies— continues to grow in popularity in the investment world. There have been ETF’s created to own them, and there are blockchain projects being built on top of them to disrupt a growing number of industries.

It seems as though the allure of Bitcoin has finally reached Corporate America.

In a stunning announcement (at least to me) Microstrategy (symbol: MSTR), a provider of business intelligence, mobile software, and cloud-based services, allocated $250 million of their corporate balance sheet to Bitcoin.

That is NOT a small investment.

Rather than listen to what I have to say, let’s see how Michael J. Saylor, CEO of Microstrategy, explained the move (his comments are a little long but well worth the read):

https://ir.microstrategy.com/news-releases/news-release-details/microstrategy-adopts-bitcoin-primary-treasury-reserve-asset

“Our investment in Bitcoin is part of our new capital allocation strategy, which seeks to maximize long-term value for our shareholders,” said Michael J. Saylor, CEO, MicroStrategy Incorporated. “This investment reflects our belief that Bitcoin, as the world’s most widely-adopted cryptocurrency, is a dependable store of value and an attractive investment asset with more long-term appreciation potential than holding cash. Since its inception over a decade ago, Bitcoin has emerged as a significant addition to the global financial system, with characteristics that are useful to both individuals and institutions. MicroStrategy has recognized Bitcoin as a legitimate investment asset that can be superior to cash and accordingly has made Bitcoin the principal holding in its treasury reserve strategy.”

Mr. Saylor continued, “MicroStrategy spent months deliberating to determine our capital allocation strategy. Our decision to invest in Bitcoin at this time was driven in part by a confluence of macro factors affecting the economic and business landscape that we believe is creating long-term risks for our corporate treasury program ― risks that should be addressed proactively. Those macro factors include, among other things, the economic and public health crisis precipitated by COVID-19, unprecedented government financial stimulus measures including quantitative easing adopted around the world, and global political and economic uncertainty. We believe that, together, these and other factors may well have a significant depreciating effect on the long-term real value of fiat currencies and many other conventional asset types, including many of the assets traditionally held as part of corporate treasury operations.”

In considering various asset classes for potential investment, MicroStrategy observed distinctive properties of Bitcoin that led it to believe investing in the cryptocurrency would provide not only a reasonable hedge against inflation, but also the prospect of earning a higher return than other investments. Mr. Saylor articulated the opinion, “We find the global acceptance, brand recognition, ecosystem vitality, network dominance, architectural resilience, technical utility, and community ethos of Bitcoin to be persuasive evidence of its superiority as an asset class for those seeking a long-term store of value. Bitcoin is digital gold – harder, stronger, faster, and smarter than any money that has preceded it. We expect its value to accrete with advances in technology, expanding adoption, and the network effect that has fueled the rise of so many category killers in the modern era.”

Mr. Saylor touched on a couple of key elements when talking about the opportunity to buy Bitcoin. He spoke of the risk to fiat currencies through inflation, the potential for higher returns in a zero-rate world, and prospects as a store of value.

To me, this move by Microstrategy is a potential sea change for how companies might consider allocating capital on their balance sheet.

Like, Mr. Saylor, we believe the future is bright for Bitcoin.

Our New Power model is always looking for “game changers” to invest in, and Bitcoin certainly falls into that camp. We have (and continue to own) several cryptocurrency-related ETF’s as part of that portfolio. You can find a full description for New Power on our website under Impact Investing https://allseasonfunds.com/impact-investing/

If you are interested in learning more about our New Power strategy, which is having an excellent year—or our broader wealth management offering— please feel free to reach out to us at (303) 837-1187 or at kris@allseasonfunds.com.

Have a great rest of your summer!

 

Warren Buffet is an investing legend.

 

When he talks, people listen.

 

Many investors—at least those that don’t blindly buy stock indexes– pay attention to what he is buying and selling hoping to unearth clues about what to do with their own portfolios.  

 

Well, through his most recent purchase Buffet has spoken VERY loudly. (I will tell you what he bought in a minute. Hint: it involves precious metals).

 

An anonymous poet once wrote:

 

People come into your life for a reason, a season, or a lifetime.

 

When you figure out which one it is,

You will know what to do with each person.

 

The same could be said for investing. Here at All Season, as many of you know, all of our investments— whether it be in individual stocks, stock indexes, or other asset classes— are for a reason or a season. No investment is for a lifetime. At least not with our approach.

 

It looks as though the same could be said of Warren Buffet.

 

Let me lay the groundwork for his latest purchase— (drumroll please) …. Barrick Gold (symbol: GOLD)— especially in the context of a reason and a season.

 

Back in 1998 during a speech at Harvard University, Buffet opined on gold:

 

“(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

 

Hmmm, that does not sound too complimentary …

 

Here is a quote from his 2018 Berkshire Hathaway Shareholder Meeting. Let us see if his opinion had changed:

 

Let’s say you’ve taken $10,000 and you listen to the prophets of doom and gloom around you — and you’ll get that constantly throughout your life. And instead, you use the $10,000 to buy gold. Now, for your $10,000 you would have been able to buy about 300 ounces of gold. And while the businesses were reinvesting in more plants and new inventions came along, you would get down every year and you look in your safe deposit box and you’d have your 300 ounces of gold. And you could look at it and you could fondle it and you could, I mean, whatever you wanted to do with it. But it didn’t produce anything. It was never going to produce anything. And what would you have today? You would have 300 ounces of gold just like you had in March of 1942.

 

Again, not too flattering …

 

Now that sounds like a strongly held, “lifetime”, belief- ie. Berkshire will never own gold or shares in a gold company.

 

Fast forward to 2020.

 

Berkshire Hathaway buys shares in Barrick Gold (https://www.kitco.com/news/2020-08-14/Warren-Buffett-buys-gold.html).

 

A complete 180!

 

The famous economist, John Maynard Keynes, was reported to have said, “When the facts change, I change my mind.” What did Buffet see that changed HIS mind? Without putting words into his mouth he is likely hedging—albeit in a small way—the risk of higher inflation coming from the size of the Fed stimulus this year. Perhaps he sees a disconnect between asset prices and the real economy brought on by said stimulus. Who knows his reasons exactly, but we happen to agree with his purchase (not that he needs our approval …).

 

Precious metals have played an important part in our All Season model going on two years now. Gold and silver have provided needed diversification and protection against the risk of higher inflation.

 

This piece is not a “gotcha” piece calling out Buffet for changing his mind. On the contrary. I only point him out to demonstrate that every holding in your portfolio should have a “reason” or a “season”.              

 

Remember: a “lifetime” can be a very long time.

 

Sean Powers, Managing Director