Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... I have three new resources for you today.
But first, a quick update...
Epochal change continues, exactly as expected. It's progressing right on schedule.
As many readers know, I called for the investment epoch to change back at the end of 2021.
The bubble was still in full bloom at that time, so the prediction was both contrary and timely.
I then spent all of 2022 providing weekly educational resources for deep learning about epochal change and the best investment strategies for this new regime.
The accuracy of this call was critically important because epochal change flips the script on valid investment strategy: - Inflation is now structural - not cyclical - which forces the Fed's hands
- Policy is now aggressively tight, making the Fed the problem instead of the solution
- On-shoring and friend-shoring is replacing off-shoring, which means the prior deflationary tailwind is now an inflationary headwind
- Structural under-investment in energy due to ESG means any future prosperity will be capped by higher energy prices, which is both anti-growth and pro-inflation
- Valuations peaked and are now mean-reverting, creating a headwind for future asset prices
- Interest rates hit a nadir finishing a 40+ year declining trend. That trend is now rising, which also creates a headwind because all assets are valued as the discounted present value of cash flows
- Rising interest rates are unsustainable long-term because the excessive government debt becomes too expensive relative to receipts. This will force a solvency problem, which creates a quandary for the government because those higher interest rates are required to tame inflation.
- The first stage down in the new epoch was a valuation decline driven by declining liquidity and rising interest rates
- Sharply rising interest rates converted duration risk into solvency risk for British pension schemes, regional banks, and commercial real estate. We're in the early stages of seeing the impact of this problem. More is expected over the next three years.
- Future declines will occur when recession and profit margin squeezes add insult to injury. Watch corporate debt defaults and junk bond premiums closely for early symptoms.
- Things will get serious when the liquidity crisis spreads into a solvency crisis. That's usually when the Fed jumps in with massive new liquidity to stem the decline because solvency problems while unwinding the extreme financial leverage caused by two decades of artificially low interest rates is systemically dangerous.
- However, unwinding all of this bad debt from the prior bubble is exactly what is required cleanse prior excesses. Until that occurs, all market rallies are temporary, cyclical blips in the longer-term structural path to full resolution.
- This new epoch will persist for likely a decade or longer. It's characterized by all the above, as reflected in extreme macroeconomic uncertainty punctuated by short-periods of extreme volatility in both directions. Buy and hold investors can expect a roller coaster ride to nowhere earning little-to-no investment return net of inflation. Tactical asset allocation investors should prosper.
This forecast was clearly explained in the final quarter of 2021 (well in advance of everything that has transpired to validate all claims made), and all data since then has only clarified and magnified the seriousness of expectations.
In short, we've already transitioned through an economic regime change that should continue for at least a full decade. The macro-uncertainty today has never been higher. Volatility in returns both directions - with no net progress over a decade net of inflation - is the only confident expectation; however, the exact path we travel to get to that zero-net-long-term-return is impossible to predict.
In other words, we know the outcome with reasonable confidence, but nobody knows the exact path and timing to get there.
We'll unpack it as it occurs. Uncertainty is the only certainty.
With that update in place, let's look at how three of today's top experts explain epochal change (along with their best investment recommendations!)...
When Stanley talks, investors should listen. Nobody has a better macro-investment track record than this guy. Nobody. When he tells you today's situation is without parallel, that should mean something. When he gives you deep cause for concern, it's smart to figure out a way to manage that risk. His concerns are, of course, identical to my epochal change call. And the only viable investment solution for this environment (if you lack the skills of Stanley, which is true for all of us!) is trend-following tactical asset allocation, as explained here. You gotta love that title! AQR Research second quarter forecast explains all the implications of today's extreme macroeconomic uncertainty. It's an easy read so follow the link. If you just want the investment conclusion, then here it is. "Some investment strategies may actually capitalize on elevated macro uncertainty.Trend-following strategies, which at their core profit from the systematic tendency of markets to gradually incorporate new information, tend to outperform when economic shocks are large and markets experience stress. The performance of the ten largest trend-following managers, has posted positive returns in the three largest equity market drawdowns since the inception of the index in 2000 (see Figure 5). A more comprehensive approach to trend following that includes economic trends and alternative marketsmay provide even more robust tail protection, as well as superior average returns." Gee, what a coincidence! (Not!) That's the exact solution I've been encouraging you to diversify (at least) a portion of your portfolio into for almost two years now. Learn exactly how to do it here... Even though Ray's writing could benefit from a professional editor, his long tenure leading the world's largest hedge fund (Bridgewater), and his deep knowledge of economic history makes him a voice that can't be ignored. This article gives a much broader and longer-term perspective to my epochal change call that is now almost two years mature. The times we are going through today cannot be judged through the lens of the past few decades of economic history. You need to have a much broader context to understand what is happening, and how it changes all of your investment and financial planning assumptions.
Onward and upward!
Todd Tresidder
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