Happy May Day!
The grass is getting greener, buds are forming on the trees, and some flowers are starting to bloom under the warm Colorado sun. I hope you are enjoying springtime as much as I am.
Current Market Conditions
As suspected in my previous Vailshire client update, macroeconomic conditions have continued to deteriorate throughout 2022.
US gross domestic product (GDP) peaked in 4Q 2021 at 7.0% before falling to -1.4% in 1Q 2022. While I predicted a massive economic slowdown in my recent updates, I did not expect real economic growth to plunge so far, so fast. It is truly ugly out there.
And speaking of ugly, inflation continues to rear its unsightly head in 2022, reaching another high of 8.5% year-over-year in March. Based on my research, I continue to think that we are at or near a peak in inflation (thank God) and will slowly disinflate throughout the remainder of 2022.
Have you noticed higher prices at the grocery store, gas station, restaurants, and pretty much anywhere you spend money these days? You can thank the Federal Reserve’s quantitative easing and intentional monetary debasement for that.
This ongoing loss of purchasing power is a huge and inevitable drawback to living with a constantly debasing government fiat currency. Thankfully, we now have an alternative money that is hard-coded to not only preserve our purchasing power over time, but actually increase it. (Hint: It’s Bitcoin.)
The next major announcement from the Federal Reserve will be on May 4th. Even with the markets crumbling before our eyes, I expect them to stay the “hawkish” course and raise the Federal Funds rate by 50 bps. They are focused on fighting the very inflation they helped create, and it will be to the ongoing detriment of risk-on assets. It is clear to me that they intend to raise rates enough to materially slow the economy in the coming months and quarters… and that they will succeed… and almost certainly cause another economic recession in doing so. In fact, the United States may already be in the midst of a recession as I write this.
Stocks and other risk-on assets continue to perform poorly and, through April, have logged one of their worst starts to a year over the past 100 years. While this is unpleasant to endure in the short-term, it has created an increasing amount of long-term buying opportunities among many companies in our portfolio and on our watchlist, which we will discuss below.
Strategies for Vailshire’s Separately Managed Accounts
Ongoing price drawdowns without intervention from the Federal Reserve are starting to create impressive buying opportunities among our favorite assets. While we still may see lower prices in the coming weeks, we are definitely closer to a bottom today than we are to the prior top.
Our “hold forever” assets continue to get dragged down by the overall market declines. However, a few of our safe haven trophy assets have held up remarkably well. These include: Autozone Inc. ($AZO), Berkshire Hathaway Inc. ($BRK.B), The Hershey Company ($HSY), McDonalds Corp. ($MCD), and Texas Pacific Land Corp. ($TPL). If you have new cash to put to work, all of our “hold forever” assets remain great long-term buys at current prices.
Given the current bearish macroeconomic outlook, it should come as no surprise that the other side of our portfolio, the “momentum trades,” predominately remains in SELL mode. That is, the majority of the 16-18 highly volatile, high performance assets we love to own are sidelined (ie, on the Vailshire watchlist) until bullish momentum is regained in the coming weeks or months.
These “momentum trades” are (historically-speaking) what have helped Vailshire portfolios to materially outperform the overall stock market during periods of bullish momentum. I have little doubt that they will do they same (or more) for us once the current bear market for risk-on assets finally comes to an end!
In addition to our “hold forever” and “momentum trade” assets, we also continue to hedge our portfolios against further downside losses. Such hedges typically include inverse exchange-traded funds that allow us to short (ie, “bet against”) the S&P 500, NASDAQ, innovation stocks, and more.
Depending on your financial objectives and individual account investment privileges, Vailshire’s separately managed accounts are currently allocated in the following manner:
- 60% select “hold forever” capital efficient and/or inflation resistant equities
- 2% “momentum trade” assets
- 22-34% cash
- 0% Bitcoin proxy, Bitcoin infrastructure, and related digital assets
- 0-4% short S&P 500 ETF
- 0-4% short/double short NASDAQ ETF
- 0-4% short US small cap stocks ETF
- 4% short innovation stocks 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 actively hedge 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!
In April, I was extremely honored to be invited to speak at the Bitcoin Conference 2022, held at the Miami Beach Convention Center. Over 25,000 people attended the event and, among other speaking engagements, I was part of the Bitcoin Macroeconomic Landscape panel discussion with Jeff Booth, Preston Pysh, Mark Moss, and Trey Lockerbie (moderator).
If you want to just see the highlights of my conversation, you can check out this 5-6 minute highlight reel, created by Bitcoin Magazine.
I had fun being interviewed by rising star, Will Clemente III, on the Blockware Intelligence podcast, which was released on April 9, 2022. Here’s a link if you’d like to check it out.
Last, but not least, I had a fun interview on the Contrarian Dude podcast with Max Wright, which was released on April 21, 2022. Feel free to watch it here and let me know your thoughts!
The ongoing stock market drawdowns have been unpleasant in the short-term. However, many of our favorite “hold forever” and “momentum trade” assets are starting to reach fire sale prices.
As the old adage goes: “Buy low and sell high.” — We are certainly approaching a “buy low” point in time and space.
If you have cash on the sidelines waiting to invest, these short-term drawdowns are providing excellent long-term buying opportunities. If your financial situation allows it, I hope you can go against the crowd, put new cash to work, and purchase great assets when the are unloved by the majority of market participants.
Having this knowledge and conviction is what sets Vailshire clients apart from the underperforming masses over the long-run.
I am honored to have you along for the ride in these exciting and tumultuous times!
Living well and investing wisely with you,
Jeff Ross, MD, MBA