Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... Are we at a bottom yet?
Is it time to buy the dip?
Those are the dominant questions in mainstream media, and I see the same in online forums and my immediate social circle.
Cathie Wood's Arkk Innovation ETF was the poster child of the prior bull market, only to lead the way down during this decline with a devastating 71% loss. Yet, during the last few months the fund has net inflows of $1.5 billion (with $600 million just since mid-June). Speculators are throwing money at this ETF despite a year-to-date decline greater than 50%.
#mindblown
It's shocking that intelligent people are still operating this way. It's symptomatic of the deeply entrenched bull market psychology from the previous epoch.
Bull markets are the time to accept risk in pursuit of profit. But when that epoch ends and volatile market declines follow, then it's time to change horses to risk management and preservation of capital.
The masses are fully trained to buy the dip, but the smart strategy going forward is different. It's now about "He who loses least, wins" because declining asset values (bear market) means cash goes up in value. Each dollar preserved in your account buys more assets as prices decline. You win by not losing.
Stated another way, inflation takes two forms - consumer inflation and asset inflation. In the past few decades we've benefited from asset inflation raising the value of our portfolios while consumer inflation was controlled. You felt richer.
Now the tables are turned. Assets are deflating while consumer items like gas and food (and everything else!!) are inflating away your purchasing power. That means you're now in the strange situation where every dollar preserved in your account buys more assets, but less food. It's asset deflation with consumer inflation - the exact opposite of the prior epoch.
Inflation has many other strange effects for investors (which is why this epoch is different and requires different strategies): Strong inflation means the Fed's hands are tied. They must raise rates and reduce liquidity to maintain credibility that they'll defend the dollar. However, the Fed is stuck between a rock and hard place because... The tools they're using are poorly suited to combat food and energy inflation. Similarly, they can't solve supply chain problems except by killing demand (recession), but that's not the desired outcome either. Yet, they must take action with the only tools they possess to defend credibility, while attempting to walk a tightrope of not sending the economy into serious recession. History says the odds of success are slim to none. Each successive period of Fed tightening over the past two decades has shown how the economy is less and less resilient to increasing rates and loss of liquidity. The margin for error gets progressively thinner with each cycle. That means fewer rate increases cause more economic damage because so many individuals and businesses are running on life support fueled by cheap interest rates. Take that life support away and financial death occurs. The result is they can't raise rates anywhere close to what the Taylor Rule would imply is necessary to tame inflation because that would assure economic collapse. And the ensuing market collapse would then cause an underfunded pension crisis, which the government (supposedly) guarantees (even though there's no real insurance behind the "guarantee.") Worse yet, they can't raise interest rates as high as required because they're the world's greatest debtor and can't afford the interest cost of their own interest rate increases. The numbers are simply unmanageable. One path leads to an inflationary problem that's destructive to all wealth and causes societal upheaval, and the other path leads to a solvency fueled asset collapse.
There are no good choices. And all of them lead to epochal change.
The script that we can expect the Fed to follow goes like this: they will raise rates until the immediate economic consequences are worse than the inflation. They will choose the politically expedient lesser-of-the-two-evils (exactly as they're doing right now!)
Stated another way, they will raise rates until they cause a recession (or break the financial plumbing in some way) so that they can save us by lowering rates. Yeah, laughably stupid.
The Fed's decision point to change course closes in when you see any of the following news items: Credit market spreads expand rapidly Economic growth decelerates Repo rates spike A couple quarters of recessionary indicators The weakest companies with leveraged balance sheets become insolvent (like Revlon already did!) The volatility index shoots up as all asset markets decline in unison.
The credible action at that point is to continue to fight inflation through the pain. Just as an alcoholic must endure detox before recovering, so must our economy endure a speculative washout if healthy prosperity is the goal. It won't be easy, but it beats the stagflationary alternative over the long term. History proves it.
But that's the least likely outcome. It's the politically difficult solution.
The most likely outcome is the Fed will blink before inflation is beat resulting in stagflation and economic repression. The new epoch will finally be officially recognized by government and media.
The immediate market response to Fed loosening would be a short-term rip-roaring rally. Hallelujah! Let the good times roll again... for a brief period. But ultimately, fundamentals would reassert themselves. More booze (artificially low interest rates and excess liquidity) just forestalls the inevitable pain and increases the danger of a disastrous outcome, but it always feels good to the alcoholic in the beginning.
As I explained previously, inflation is the catalyst to epochal change because it forced new rules to the game. It's the pin that pricked the bubble and put everything else in motion. But the underlying instability of the entire system (like an addicted alcoholic's body chemistry) is what transforms today's situation from a normal, contained bear market measured in months, to an extended period of volatile and difficult epochal change measured as a decade or longer.
Five decades of activist Fed intervention converted what would have been an easily manageable series of one standard deviation declines into a protracted five standard deviation event - epochal change.
You either manage your portfolio for change or get blindsided by it. As Charles Darwin stated, "It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change." (See here for the investment strategy package I recommend specifically designed to respond to these changes in real time as they happen.)
The next decade will cleanse the speculative excesses and cheap money distortions caused by the prior epoch until a solid foundation for the next wave of prosperity is established. It will be a volatile ride to nowhere. At the end of 10-15 years, the passive buy and hold investors will have endured massive volatility pain, likely a net nominal loss, and almost certainly an inflation adjusted loss, for all their suffering. It takes time and pain to unwind the speculative excess of a generational bull market. It doesn't occur in months. It takes years of volatile rises and declines.
The game going forward isn't solved by asking if we're at a bottom yet. That's how the old market of yesteryear worked when the Fed could bail out every decline.
The new game of epochal change is solved by adopting a different investment strategy specifically designed to respond to change as it occurs. By definition, that's not passive.
As Jon Kabat-Zinn explained, "You can't stop the waves, but you can learn to surf."
This week's resources are all about inflation...
This classic video is just too good to pass up. Milton Friedman states the obvious in clear language that everyone can understand and with zero political correctness. Watch to the end as Friedman takes the central bankers and politicians to task in a round-robin discussion with aggressive, pointed arguments. It's brilliant stuff for economic junkies. Today's problems prove how every point he made four decades ago remains timeless wisdom. Dan dissects our current inflation predicament into its component parts, so you can set realistic expectations going forward. Then he points out the (currently) missing fourth component to inflation and how dangerous it is. Let's hope we can avoid it... Will inflation become volatile just like financial markets? This analysis and its conclusions are unusual for a large institution, including their assertion that one of the top strategies going forward will be trend-following (exactly the solution I've been advocating for the past year, well before the bear market began, to help you protect and grow your capital!) Will this well-researched expert analysis help you finally take action?
Onward and upward!
Todd Tresidder
Invest Like Todd: This investment software solution includes two of Todd's top investment systems. Learn how to sleep peacefully and secure your financial future in good times and bad. I use the same to manage my own money, and my clients are loving the results they're getting. My flagship Expectancy Wealth Planning master course shows you how to maximize the expected growth of your wealth in every market condition regardless of epochal change. Join this smart community of active wealth builders to secure your financial future. |
