August 2023 Update for Vailshire’s Separately Managed Account Clients

To SMA clients and friends of Vailshire Capital Management:

  • The Fed raised 25 bps, Powell spoke… and the markets yawned
  • Both worldwide liquidity and net liquidity in the US have been trending sideways-to-down since their peaks in 1Q 2023
  • During the month of July, we added two more capital efficient businesses to our “stagflation-busting” portfolios

Current Market Conditions

Crabbish: Neither Bullish Nor Bearish

Hello from Colorado!

I was recently honored to be on a couple of interesting podcasts:

Feel free to check both of them out and let me know your thoughts!

As expected, the Federal Reserve raised the closely-followed federal funds rate (FFR) by 25 basis points at their latest FOMC meeting. Immediately thereafter, Jerome Powell gave an uninspiring and directionless speech… at which the markets yawned.

Disinflation has continued through June, while unemployment and option-adjusted spreads of high yield bonds remain subdued. US and worldwide manufacturing metrics are solidly in contraction territory, while services (the mainstay of the US economy) are still mildly expansionary. Bank lending continues to falter, as do commercial real estate valuations.

Both worldwide liquidity and net liquidity in the US have been trending sideways-to-down since their peaks in 1Q 2023.

For these reasons and more, I am in the sideways (“crab-like”) camp regarding the price action of risk assets and bitcoin for the time-being. It feels, to me, very much like the calm before the storm.

The graph below depicts weekly US net liquidity (blue line) and major world bank approximate liquidity (gold line at bottom) since the beginning of May 2023, compared with the 11 largest Vailshire portfolio holdings of: AutoZone, Inc.(ticker: AZO), small cap stocks with high free cash flow (FCF) yields ETF (CALF), large cap stocks with high FCF yields ETF (COWZ), Franco-Nevada Corp. (FNV), MicroStrategy (MSTR), NVR, Inc. (NVR), NASDAQ stocks (QQQ), Texas Pacific Land Corp. (TPL), Tesla, Inc. (TSLA), Vanguard Total International Stock Index Fund (VXUS), and Valkyrie Bitcoin Miners ETF (WGMI). Note that US net liquidity has mildly contracted by -1.1%. Outperformers include TSLA (54%) and WGMI (44%), while AZO (-8%) and FNV (-10%) have relatively underperformed.

Strategies for Vailshire’s SMAs

During the month of July, we added two more capital efficient businesses as long positions to our “stagflation-busting” portfolios: MSCI Inc. (ticker: MSCI) and NIKE Inc. (NKE).

Our Vailshire portfolios continue to be allocated towards a 60% equity and 40% sound money structure. I believe that this two-pronged approach will serve us well throughout this decade of anticipated economic stagnation, high and/or volatile inflation, and eventual credit and monetary expansion.

Here is a summary of our current 60/40 “stagflation-busting” Vailshire portfolio allocations:

Vailshire’s Aggressive separately managed accounts (SMAs) are allocated as follows (current base % position size):

EQUITIES (60%)

  • 2.5% ADBE
  • 7.5% AZO
  • 5% CALF
  • 5% COWZ
  • 2.5% MELI
  • 2.5% MSCI
  • 2.5% NKE
  • 5% NVR
  • 5% QQQ
  • 7.5% TPL
  • 5% TSLA
  • 2.5% TT
  • 2.5% V
  • 5% VXUS

SOUND MONEY (40%)

  • 10% FNV (gold royalty)
  • 15% MSTR (bitcoin proxy)
  • 10% WGMI (bitcoin miners)
  • 5% cash

Vailshire’s Moderate separately managed accounts (SMAs) are allocated as follows (current base % position size):

EQUITIES (60%)

  • 2.5% ADBE
  • 7.5% AZO
  • 5% CALF
  • 5% COWZ
  • 2.5% MELI
  • 2.5% MSCI
  • 2.5% NKE
  • 5% NVR
  • 5% QQQ
  • 7.5% TPL
  • 5% TSLA
  • 2.5% TT
  • 2.5% V
  • 5% VXUS

SOUND MONEY (40%)

  • 15% FNV (gold royalty)
  • 10% MSTR (bitcoin proxy)
  • 5% WGMI (bitcoin miners)
  • 10% cash

Vailshire’s Conservative separately managed accounts (SMAs) are long-only and are allocated as follows (current base % position size):

EQUITIES (60%)

  • 2.5% ADBE
  • 7.5% AZO
  • 5% CALF
  • 5% COWZ
  • 2.5% MELI
  • 2.5% MSCI
  • 2.5% NKE
  • 5% NVR
  • 5% QQQ
  • 7.5% TPL
  • 5% TSLA
  • 2.5% TT
  • 2.5% V
  • 5% VXUS

SOUND MONEY (40%)

  • 20% FNV (gold royalty)
  • 5% MSTR (bitcoin proxy)
  • 5% WGMI (bitcoin miners)
  • 10% cash

Vailshire’s Ultra Conservative separately managed accounts (SMAs) are long-only and are allocated as follows (current base % position size):

EQUITIES (60%)

  • 2.5% ADBE
  • 7.5% AZO
  • 5% CALF
  • 5% COWZ
  • 2.5% MELI
  • 2.5% MSCI
  • 2.5% NKE
  • 5% NVR
  • 5% QQQ
  • 7.5% TPL
  • 5% TSLA
  • 2.5% TT
  • 2.5% V
  • 5% VXUS

SOUND MONEY (40%)

  • 20% FNV (gold royalty)
  • 5% MSTR (bitcoin proxy)
  • 15% cash

Vailshire’s Bitcoin Only separately managed accounts (SMAs) are allocated as follows (current base % position size):

  • 95% MSTR (bitcoin proxy)
  • 5% cash

**As written in prior emails and client updates, SMA clients in FL and TX remain in cash-only positions as Vailshire awaits state-specific regulatory approval to begin/resume investing on behalf of these client accounts. But good news! Both CA and MN have formally approved Vailshire Capital Management, and clients in these states have been contacted with instructions on how to proceed.**

If you are a Vailshire client, feel free to log in to your account(s) at Interactive Brokers and see how your own portfolios are positioned. (It’s a good idea to log in and review your account(s) at least quarterly, just to make sure your settings and demographics are up to date.)

Conclusion

Still Bullish

Graph (above): Since bottoming near the end of December 2022, bitcoin miners ($WGMI) have continued higher in a strong, bullish trend, as depicted by the blue and red regression trend channel. Note also that the price is above both its 50- and 200-day moving averages… additional signs of bullish momentum.

Many bullish and bearish signals persist, leaving us with probable sideways (“crab-like”) price action for the foreseeable future. While I certainly don’t have the ability to predict the future, we can be wisely prepared for an expected long decade of economic stagflation and volatile inflation.

Our “stagflation-busting” Vailshire portfolios are filled with a diversified collection of stocks and sound money assets that are likely to continue trending higher over the long-term. If any of these assets fall in price over the short or medium term, then I would be thrilled to add even more to our core, long-term positions within our Vailshire separately managed accounts.

I’m thankful and honored by the trust you continue to place in me and in Vailshire Capital Management.

Living well and investing wisely with you,

Jeff Ross, MD/MBA