Happy Independence Day!
I hope all is well with each of you and that you have some time to ponder and celebrate freedom in the coming days.
Current Market Conditions
The bad economic news is starting to pile up… and it is truly awful.
While the Fed raises the federal funds rate to “cool off” our “strong” economy, the market is starting to show foundational cracks.
Stocks are down. Mortgage rates are (much) higher. Housing prices are starting to roll over, but are still unaffordable for many would-be buyers because of the (much) higher mortgage rates. Manufacturing is down. New orders are down. Food and gas prices are painfully high. Businesses are laying off employees. Consumer sentiment is in the dumps.
We are almost certainly in the early stages of a recession already, and things are going to get much worse before they get better.
Based on Federal Reserve Chair Jerome Powell’s recent comments, the Fed will not stop its “inflation fighting” monetary tightening policies until they see evidence of sustained disinflation. However, with oil prices still hovering above $100 per barrel, inflation may (unfortunately) remain sticky high for longer than most Americans are ready for.
This means that the markets may continue to slowly grind lower for the foreseeable future.
The alternative, however, may be worse.
If the Fed-induced demand destruction takes hold sooner than later, then we may see a fast and furious decline in the price of oil, which could cause the floor to drop out under already fragile #RiskOn assets–similar to what occurred in late 2008/early 2009.
Whether fast or slow, the recession will likely deepen and risk assets may have much further to fall.
Our past predictions for a stagflationary decade, with intermittent asset booms and deflationary busts, is already upon us. Thankfully, long-term opportunities favor the prepared.
Strategies for Vailshire’s Separately Managed Accounts
We cleaned house in June.
Nearly nine years in the making, Vailshire’s proprietary trading system has been telling me to get out of almost all #RiskOn assets entirely since December 2021 and January 2022. Ironically, I have been fighting against the very system I created by continuing to own our “hold forever” assets. While these assets are clearly fantastic businesses to own over long periods of time, they have been getting pulled down strongly by the ever-declining stock market… which have hurt our portfolio returns.
After trimming these positions in May 2022, we completely sold all but one “hold forever” business, Texas Pacific Land Corp. ($TPL), which remains in a bullish trend. We will continue to hold $TPL as long as it remains in bullish formation.
We also took advantage of the mid-June bear market bounce that occurred in stocks, to significantly increase our SHORT positions in growth/innovation/technology stocks at great entry points. These stocks and related funds typically generate the highest amount of alpha during both bull and bear markets.
Finally, towards the end of the month, we were able to add a SHORT bitcoin futures ETF to take advantage of the strong bitcoin bear market. When a bitcoin bottom is finally confirmed in the coming months or quarters, I look forward to adding material LONG positions to our portfolios for the much-anticipated bull run. Bitcoin remains–hands down–the greatest form of money our world has ever seen.
Depending on your financial objectives and individual account investment privileges, Vailshire’s Aggressive and Moderate separately managed accounts (SMAs) are currently allocated in the following manner (% base positions):
- 40-45% double SHORT NASDAQ ETF
- 3% long energy stocks
- 3% long Chinese stocks
- 10% SHORT btc futures ETF
- 39-44% cash
Vailshire’s Conservative SMAs have limited trading privileges and are currently allocated in the following manner (% base positions):
- 35% SHORT innovation stocks
- 3% long energy stocks
- 3% long Chinese stocks
- 59% cash
If you are a Vailshire Client, feel free to log into your Vailshire-managed account(s) at Interactive Brokers and see how your own portfolios are positioned. (It’s a good idea to log into your accounts at least quarterly, just to make sure your settings and demographics are up to date.)
**Important note: For those “Conservative” clients who wish to be more aggressively hedged against anticipated declines in the equities markets, you will need to log into your Vailshire account(s) at Interactive Brokers and apply for trading privileges in “leveraged or complex exchange traded products.” If you need help with this, please let me know and I will re-send instructions from Interactive Brokers to your email. Also, if you decide to move forward with this account change, please let me know so I can begin hedging your account on your behalf.
Vailshire in the News!
On June 27, 2022, Jordan Wirsz had me back on the Savant report for “Another Hard-Hitting Macro Bitcoin & Crypto Market Update,” which was a ton of fun!
Finally, I was recently featured on the “Surviving the Bear Market” segment of Hard Money with Natalie Brunell. The show also included an interesting interview with Michael Saylor. Here’s a link to the entire show, if you’re curious.
The Federal Reserve is tightening into worsening financial conditions, inflation remains sticky high for now, and we are likely in the early stages of a severe economic recession.
Opportunities favor the prepared.
Thankfully, Vailshire’s systematic investment process and proprietary trading system have our portfolios positioned for success in the coming months and quarters, come what may. Our contrarian approach to the traditional 60/40 stock/bond portfolio helped us to significantly outperform the S&P 500 in June… and we currently stand ready to face future bearish drawdowns.
I’m grateful for the trust you have placed in me. I will continue to serve you and invest on your behalf to the best of my abilities.
Living well and investing wisely with you,
Jeff Ross, MD, MBA