Hello from Colorado!
Our kids are finished with the school year and are home for the summer. My wife and I are ecstatic to spend some quality time with them in the coming months.
I hope each of you is doing well.
Current Market Conditions
The macroeconomic conditions in the United States and across most of the developed world are looking increasingly grim.
1Q 2022 US GDP numbers were just revised downward… from -1.4% to -1.5%. Not a drastic change, but it is definitely not good news when our country’s economic engine starts to falter.
Inflation in April came in slightly lower than the March result, with a CPI of 8.3% (versus 8.5% in March 2022). While the smaller number suggests that inflation has possibly peaked and is no longer spiraling out of control, it is also still uncomfortably high.
As I have written in prior monthly updates, high inflation means higher prices for our groceries, restaurants, gas, medical care, school tuition, utilities, etc. And a higher cost of living generally means a lower quality of life across the board, both in the US and around the world. Some of you who are working may have received raises, but they were almost certainly not large enough to combat the pernicious increases in our monthly bills.
On top of this ugliness, the Federal Reserve remains “hawkish.” That is, they are actively raising (federal funds) interest rates and selling some of their US Treasuries and mortgage-backed securities (MBS). This decreases liquidity throughout the financial system… causing a mad dash for the US dollar and a decline in richly valued stocks, bonds, and real estate.
Why is the Fed so hawkish? It is quite intentional.
Since inflation is so uncomfortably high and demand for goods and services far exceeds the available supply/workforce, the Fed is actively destroying demand by raising interest rates, resulting in decreased borrowing, and lowering the nation’s “wealth effect” by bringing down overheated stock, bond, and real estate valuations. Ideally (for them), these forces will work synergistically to bring supply and demand back into alignment.
The downside, however, is that their actions will almost certainly lead to a recession. Jerome Powell, the Fed chair, affectionally calls this a “soft landing.”
I am of the opinion that nothing about the coming months will feel soft or snuggly. Rather, people and businesses are going to suffer. This is a rare “hope for the best, prepare for the worst” moment in our nation’s history.
Strategies for Vailshire’s Separately Managed Accounts
Given our current economic and inflationary woes, Vailshire portfolios have taken an increased defensive posture. Our goal is to preserve capital in the most efficient manor possible, while trying to make gains in select sectors and funds that continue to work well in this difficult environment.
As much as we love them, we have decreased the overall exposure of our 15 “hold forever” assets from 60% to 45% of our portfolios. Some specific capital efficient businesses that continue to demonstrate admirable share price performances in 2022 include: Autozone Inc. ($AZO), Berkshire Hathaway Inc. ($BRK.B), The Hershey Company ($HSY), McDonalds Corp. ($MCD), Texas Pacific Land Corp. ($TPL), and Waste Management, Inc. ($WM). I expect all of our “hold forever” assets to provide rewarding shareholder returns throughout this stagflationary decade.
Of the 20 high performance “momentum trades” on Vailshire’s watchlist, only four are currently in BUY mode. These include three energy-related equities: Chevron Corp. ($CVX), Cheniere Energy, Inc. ($LNG), Occidental Petroleum Corp. ($OXY)… and one Chinese equity: Pinduoduo, Inc. ($PDD). We will know that we are at the start of a new, robust bull market again when most or all of our “momentum trades” are back in BUY mode. In the meantime, we are content to keep the majority of them sitting on the sidelines!
Finally, our portfolio hedges are all performing quite well so far in 2022. My biggest mistake to date was simply keeping these position sizes too small for too long! Had I ramped them up quickly to their current full size positions, we would have had an even better performance year-to-date. All eight of our portfolio hedges are currently in BUY mode… which means the bear market rages on.
Depending on your financial objectives and individual account investment privileges, Vailshire’s separately managed accounts are currently allocated in the following manner:
- 45% select “hold forever” capital efficient and/or inflation resistant equities
- 10.5% “momentum trade” assets
- 8.5-39.5% cash
- 0% Bitcoin proxy, Bitcoin infrastructure, and related digital assets
- 6% SHORT innovation stocks ETF
- 0-6% SHORT S&P 500 ETF
- 0-6% SHORT/DOUBLE SHORT NASDAQ ETF
- 0-6% SHORT US small cap stocks ETF
- 0-6% SHORT high yield (“junk”) bonds
- 0-6% LONG US dollar ETF
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 clients who wish to be actively hedged against anticipated declines in the equities markets but do not see them within your account(s), 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!
It was another busy month for me regarding Twitter Space events and podcast interviews.
Preston Pysh hosted another fun and informative roundtable discussion on Bitcoin and Macroeconomics–featuring Jay Gould, Joe Carlasare, and myself–which was released on YouTube on May 18, 2022. Here’s a link in case you’re interested in watching it.
On May 19, 2022, Dr. James Dahle released the White Coat Investor Podcast #263, where we discussed my transition from medicine to hedge fund management, the difference between Bitcoin and “crypto” assets, investment strategies, and more.
Finally, I did a macroeconomic, Bitcoin, and general market update with the up-and-coming podcaster, Jordan Wirsz, which was released on May 30, 2022. You can check out the 25 minute show using this link and tell me your thoughts.
Conclusion
The macroeconomic environment remains dire, to say the least!
Thankfully, Vailshire’s dynamic and multifactorial portfolio approach is increasingly finding the right balance of defensive strategies and high-performance assets and hedges in which to invest.
I’m truly honored that you have chosen–or are considering–Vailshire to be your home for your long-term investments and savings. I take very seriously the confidence you have placed in me.
Living well and investing wisely with you,
Jeff Ross, MD, MBA