Happy New Year from Colorado Springs!
2022 was a difficult year for many in the financial markets. At the start of 2023, it still looks like it will get worse before it gets better.
Not a particularly fun way to start my first update of 2023 but, as the saying goes, we must “play the hand that we are dealt.”
Let’s dig in…
(Graph: Represented by $QQQ, the NASDAQ stocks declined a cool -33% in 2022… and look poised for further losses as the new year begins.)
Current Market Conditions
Like each optimism-filled bear market rally of 2022, December began with a small bang before ending with a larger whimper.
Jerome Powell and the Federal Reserve (aka “the Fed”) had a chance to ignite a “Fed pause” rally in risk assets during their mid-December meeting but, instead, they chose violence. That is, Powell doubled-down on his hawkish rhetoric, stating that the Fed will continue to raise the federal funds rate, and keep it higher for longer.
Stocks quickly returned to their bearish downtrend while bonds, interestingly, did not react very much. The 2 Year Treasury yield began the month at 4.26% and ended December a bit higher: at 4.42%.
It is significant to me that the 2 Year Treasury yield is still below the upper end of the federal funds rate of 4.5%. Inversion at the short end of the yield curve suggests that the bond market does not necessarily believe that the Fed should continue hiking the federal funds rate. Inversion throughout most of the yield curve also makes it difficult for banks and related financial institutions to easily make money, given their “borrow short and lend long” revenue-generation models.
The trifecta of a continually slowing US economy, disinflation (from an uncomfortably high CPI peak), and an unceasingly hawkish Fed create a particularly difficult environment for risk assets from a historical perspective. From my vantage point, risk assets will continue to perform poorly until something changes… or breaks.
Strategies for Vailshire’s Separately Managed Accounts
Vailshire portfolios were not immune to the challenging investment environment of 2022. It was particularly frustrating for me to be so publicly correct about the deteriorating macro environment, but to not have those bearish views equate to consistent outperformance across our actively managed portfolios.
However, there is a material silver lining.
I still strongly believe that the simple buy-and-hold 60/40 stock and bond portfolio outperformance of the go-go 2010s ended abruptly in 2021. And, when real returns (nominal minus inflation) are calculated at the end of the 2020s, such traditional portfolio allocations are unlikely to show significant, if any, gains. In fact, I think that real losses are the most likely outcome.
In light of this, the above-mentioned “silver lining” from a difficult 2022 was the creation and implementation of Vailshire’s proprietary trading system (version 1.0) in mid-June of 2022, followed by the enhanced version (2.0) in mid-December 2022. Our proprietary system (v2.0) now blends my deepest macro convictions and expected returns on select asset classes with volatility- and momentum-based methods, across both long and short time frames.
Said another way, Vailshire’s trading system (v2.0) still maintains a long-term bias, but now has a high degree of shorter-term nimbleness built-in.
While the future is unknowable, I couldn’t be more excited about where we are headed!
With these factors in mind, here is a summary of our current Vailshire portfolio allocations:
For Vailshire’s Conservative, long-only accounts, we currently hold only two individual stocks, while the remainder of the accounts are sitting in cash. It’s hard to believe, but the 30+ additional assets on our long-only watchlist all remain in a strong bearish downtrend. When any of these assets turn bullish, they will be added to our portfolios accordingly.
Our Moderate and Aggressive portfolios have been aggressively short biased since mid-December. These portfolios also hold two small long individual stock holdings which are in bullish formation.
Note that if momentum shifts direction in the short term across any or all of our current holdings, then so will our portfolio composition shift. This added short-term trading component should add a high degree of nimbleness across all Vailshire portfolios going forward.
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):
- 80-90% select inverse ETFs
- 3% LONG individual equities
- 7-17% cash
Vailshire’s Conservative SMAs have limited (long-only) trading privileges and are currently allocated in the following manner (% base positions):
- 4.5% LONG select stocks
- 95.5% cash
Given the trading and investing limitations of our Conservative accounts, I am not able to actively hedge these portfolios.
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!
In early December 2022, I underwent a reconstructive surgery on my nose (for internal nasal valve collapse and a deviated septum). In light of this, and multiple unfortunate complications, I had to cancel several interviews throughout the month.
- A direct link to my panel discussion from the Pacific Bitcoin Conference in November was recently released by Swan Bitcoin. It was entitled “Thriving During the Great Monetary Reset with Mark Moss, Dr. Jeff Ross, Louis Liu and Nico Moran.”
Please enjoy the content and let me know what you think.
2022 was a tough year for most people in the financial markets. With a recessionary bear market likely headed our way in the first half of 2023 I think it is best to be prepared for several possible difficult scenarios.
Thankfully, Vailshire’s proprietary trading system (v2.0) is fully implemented as of mid-December 2022. It is designed to flow into and out of asset classes across shorter time frames during periods of high volatility, while riding longer-term trends when market volatility subsides.
As the new year begins, I am thankful for your trust in me to manage your hard-earned assets over the long-term. Rest assured, I will continue to strive for all Vailshire clients every day to the very best of my abilities.
I am grateful for you and for this challenging opportunity!
Living well and investing wisely with you,
Jeff Ross, MD, MBA