October 2022 Update for Vailshire’s Separately Managed Account Clients

Autumn has arrived here in Colorado!

I hope each of you is doing well.

(Graph: The S&P 500 is down a whopping -17% since its epic “fail” on 16-August-2022!)

Current Market Conditions

They call me “Dr. Bear” on Twitter for a reason.

Almost every day, I speak on a live Twitter Spaces event or a podcast interview, telling people about how macroeconomic conditions are going from bad to worse.

As a natural optimist, it is hard for me to continue delivering such bearish news as I have been doing over the past nine months.

But, as a realist and truth-seeker, I simply cannot help myself from doing so.

The Problem

The “problem” is that things don’t appear to be getting better any time soon. By some metrics, equity, bond, and real estate valuations were at all-time highs in late 2021 and early 2022. Even though these valuations have dropped considerably since the beginning of the year, the world is currently careening into a full-fledged recession.

And, to make matters worse, the Federal Reserve continues to “tighten,” that is, raise the federal funds rate and sell Treasuries and mortgage-backed securities because of our sticky high inflation problem. Most of the other central banks around the world are following suit.

Record high asset valuations, sticky high inflation, and central banks tightening into a worldwide recession… what could possibly go wrong?

Many things.

For those of us who are old enough to remember investing through the 2000-02 “Dot.com Crash” and the 2006-09 “Global Financial Crisis,” we vividly remember what it feels like when financial markets are spiraling out of control. At the very least, we remember what happened to our stock and bond portfolios during that time.

If you have paid any attention to my past monthly updates to Vailshire clients, then you know why I worked so hard to develop a proprietary long-term trading system for these perilous and volatile times. Rather than simply buying and holding great companies through thick and thin (our old methodology), our new system attempts to profit from major market swings, whether up or down.

Strategies for Vailshire’s Separately Managed Accounts

Vailshire’s proprietary long-term trading system continues to be unabashedly bearish. This means that, until our momentum indicators make a decisive transition, we will remain heavily short (or bearish) in our portfolio positioning.

For our Conservative, long only accounts, this means that we are now in 100% cash only positions… earning up to 2.58% annualized thanks to Interactive Brokers. Last month, our energy stocks were still in bullish formation, but they have since triggered their trailing stop losses… meaning we cashed out to protect these portfolios from further downside.

Our Moderate and Aggressive portfolios have fared quite well in September. We have held maximum short position sizes in two alpha-generating asset classes (described below) and have also maintained relatively large (interest earning) cash positions.

We will continue with our current portfolio allocations until momentum clearly shifts from bearish to neutral or bullish. Based on my macroeconomic research, this shift to bullishness may not occur for quite some time.

As previously written, the ultimate goal of Vailshire’s long-term trading system is to profit over the long-term, whether markets are moving higher or (importantly) moving lower.

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
  • 20 – 22.5% SHORT bitcoin futures ETF
  • 32.5 – 40% cash (earning interest at IB)

Vailshire’s Conservative SMAs have limited (long-only) trading privileges and are currently allocated in the following manner (% base positions):

  • 100% cash (earning interest at IB)

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!

A recent interview with Contrarian Dude (aka Max Wright) was very well-received. It’s entitled: “It will get worse before it gets better.” In it, we discuss the current macroeconomic data, as well as my thoughts on the performance of stocks, bonds, currencies, and bitcoin.

Please enjoy!

Conclusion

The most recent market data confirms that inflation is remaining sticky high while the world careens into a (possibly deep and ongoing) recession. With central banks around the world raising and holding interest rates high, risk assets may continue performing poorly for the foreseeable future.

Thankfully, Vailshire’s proprietary long-term trading system is providing strategic and profitable strategies during these turbulent times. Combining my macroeconomic research with momentum and volatility-based tools, we can face an unknowable future with confidence.

I appreciate you and the trust you have placed in me by allowing me to manage your hard-earned money. I do not take this responsibility lightly.

Living well and investing wisely with you,

Jeff Ross, MD, MBA