Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... Can you feel the tension rising?
It's starting to get interesting out there...
As stated for the last 18 months since I first made the "epochal change" call for regime change back in 2021, the Fed would increase interest rates until the first to occur (1) inflation was tamed, or (2) something serious in the financial plumbing broke.
Well, we're now starting to see breaks in the financial plumbing, but inflation is still far from tamed.
That's problematic.
The noose around the Fed's neck is getting tighter. Policy is becoming less certain.
As explained last month, uncertainty is the name of the game going forward. The following bullet points give you the big-picture overview for the next decade: - Inflation is embedded in any growth scenario for likely a decade or longer because of structural limits to energy production, geopolitical changes, manufacturing on-shoring, and demographics. The implication is that each new growth phase in the foreseeable future will promptly get capped as soon as it starts because of consequent inflation.
- Zero percent interest rates and record stock market valuations are behind us, thus defining the upper bound as also behind us (which is still not that far away despite last year's decline).
- High interest rates are unsustainable because government debt levels would spiral out of control. That means interest rates can't stay high - particularly real interest rates - or government liabilities will grow at an unsustainable rate.
- However, the Fed must persist in raising rates until inflation is tamed to maintain credibility. They are clear that they do not want to repeat the policy mistakes of the 1970's.
- The financial leverage built into the system from prolonged, artificially low interest rates created underlying instability and increased the risk of something important breaking. We don't know what will break, or when, but we do know it will happen as interest rates rise.
- And we know that every time something major breaks, central banks will rush to the rescue with liquidity resulting in a temporary, cyclical bull market.
- But the cyclical bull can only be temporary because the structural changes cited earlier cap any temporary rise.
- In summary, the next 10-15 years will be a macro-driven roller-coaster with sharp cyclical rises and even sharper declines as things break, inflation surprises, and governments respond. But the upper boundary is already defined, and the lower boundary is anxiously waiting to be discovered. The net effect is a volatile ride to net-zero real returns for passive buy and hold investors for a decade or longer.
- The historically proven investment strategy to pursue positive real investment returns net of inflation during a decade of macroeconomic uncertainty is tactical asset allocation.
My suggestion is you print those bullet points out so you can refer back to them.
I penned them last month, and the bank failures of last week followed by the government (and market) response this week fit the above playbook like a glove.
Those bullet points also explain what to expect after the immediate response to this crisis ends.
In other words, we now have our first headline system breakage - bank failures - and we're already getting the expected government response. It's all playing out according to script.
The Silvergate failure is no surprise given the crypto collapse and FTX failure. We can consider this a one-off and not connected to the larger financial system.
But Silicon Valley Bank (SVB) and Signature Bank can't be so easily dismissed. These are large, systemically important banks.
It appears (as of this writing) that the government has moved swiftly over the past weekend to restore confidence in the system and provide liquidity to depositors. Maybe their actions will be sufficient to restore confidence making this just a warning shot over the bow instead of the start of something bigger. Only time will tell...
Again, I'm not making predictions about specific events because nobody knows exactly how the future will unfold. The exact path of the future is unknowable, even if the systemic patterns, risks, and ultimate outcomes are knowable.
The key point, as explained in previous newsletters, is that there are lots of "dead bodies" hiding in the depths of decades of excess Fed liquidity that will be forced to float up and reveal themselves with tighter Fed policy. And don't ever pretend you know where those dead bodies will rise from, because you don't.
Nobody does.
Honestly, I thought pensions or junk bonds would be the first domino to fall. And maybe it will still happen that way, but right now the failures are in the banking system.
That's the nature of uncertainty (which was my forecast for the next decade).
Right now, we don't know if we're at the beginning of a run on the banks resulting in systemic failure, or if the government's actions will restore enough confidence to temporarily re-bury this systemic weakness.
We don't know if the Fed will see the latest breaks as sufficient evidence of systemic stress to reverse tight monetary policy, or if they believe they can patch the holes in this leaky life boat and continue tightening policy to tame inflation.
As previously stated, it's starting to get interesting. Uncertainty is increasing.
Stuff is starting to break, but inflation still isn't tamed.
The Fed needs to continue its path of rising interest rates and quantitative tightening to beat inflation and maintain credibility, but the financial system is showing signs of stress.
Which domino will fall first?
In this volatile, unpredictable macro environment, the proven investment strategy to manage uncertainty with mathematical discipline is tactical asset allocation (TAA).
And the done-for-you tactical asset allocation platform I recommend is here. It's a subscription service that takes care of all the math, algorithms, data management, and other complications making the investment decision process turn-key easy for you, while still priced affordably at just $399 per year. That low price makes financial sense for any investor with more than $20,000 at risk in their savings.
At a minimum, it makes financial sense for investors to consider diversifying their source of return (deep diversification) by allocating a portion of their assets to TAA thus diversifying the risk profile of their buy-and-hold passive asset allocation (see today's resource below for more education on this topic.)
In other words, you don't have to be committed all-or-nothing either direction. In an environment of great uncertainty, as we have today, it can make sense to diversify your source or investment return into more than one strategy.
The challenge most investors face is they don't understand TAA. It's not as common, or as simple, as conventional passive asset allocation. It takes some getting used to, which is why I include an entire email course with each subscription to give you paint-by-numbers instructions to get started the smart way.
It's also why I'm giving you only one resource today. It's a podcast interview with a multi-strategy asset manager who explains how you diversify by source of return (deep diversification) using trend following (TAA).
Also, I'll provide a bit more explanation than usual for today's resource (since there is only one) to clarify a few points that might cause some confusion when listening to this interview.
I hope you get valuable investment strategy insights from today's resource...
Crisis Alpha Revisited - Podcast Interview on Spotify with Katie Kaminski of AlphaSimplex Group on Top Traders Unplugged Podcast Katy gives a great interview explaining several essential investment topics that are seldom discussed - how trend following works, why it's so valuable in an environment of great macro uncertainty, crisis alpha, deep diversification by source of return, how to blend investment strategies, and much more. When listening, there are a couple of things that will help you understand the ideas being shared. Managed futures and trend following are sometimes used interchangeably, which is misleading. That's because trend following was first applied to managed futures many decades ago to tame the high volatility risk. Some people now use the terms interchangeably because of that legacy, but managed futures can be accomplished with macro investment strategy, technical analysis, or other strategies. The two terms are not synonymous even though they are frequently misused that way. Trend following is a risk management overlay that can be effectively applied to any asset class - futures, individual stocks, bonds, mutual funds, or ETFs. Additionally, with the growth of specialty ETFs accessible from any brokerage account, the distinction between commodity futures and ETFs has narrowed because you can now trade gold, commodities, oil and much more through ETFs using trend following in your regular brokerage account (you just don't get the implicit leverage of futures and shorting the market is problematic with ETFs). My point is you'll have to listen closely to separate the points exclusive to managed futures from the points relevant to trend following in general, whether in ETFs or managed futures. My recommended investment solution allows you to manage market risk while pursuing positive returns in this uncertain investment environment using tactical asset allocation with ETFs (not managed futures) from any standard brokerage account. You don't have to open any new futures account or give up control of your existing brokerage account to a manager. It's easy-peasy inside your current brokerage account with you retaining full control - all for just $399 per year. I hope that clarification in terms helps you get the most value from this conversation.
Onward and upward!
Todd Tresidder
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