To SMA clients and friends of Vailshire Capital Management:
- Liquidity and global M2 continued their sideways-to-down trajectory and many assets have struggled
- Instead of a tailwind, many investors are now facing multiple headwinds in the form of high interest rates, sticky high inflation, a strong dollar, and dissipating liquidity
- Our oil and gas stocks (OXY and TPL) continue to flourish based on the strong price momentum of their underlying commodity: oil. I expect these assets to be star performers over the coming decade
Current Market Conditions
Headwinds and Crab Markets
Hello from Colorado Springs!
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I was recently invited back to Max Wright’s Contrarian Dude YouTube channel to discuss the current macroeconomic landscape. This month’s show was recorded on September 22, 2023 and was entitled: How will the recession play out?
It’s fast-paced and only 17 minutes long, so feel free to give it a watch and let me know your thoughts!
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In last month’s update I wrote, “liquidity is like oxygen for markets” and expressed the opinion that unless liquidity stops moving sideways (“crab-like”) to down, then risk assets and bitcoin may continue to perform poorly.
Unfortunately (for risk assets and bitcoin), this premonition proved to be the case. Liquidity and global M2 (shown in the chart below) continued their sideways-to-down trajectory and many assets have struggled.
At the conclusion of the Federal Reserve’s September meeting, Chairman Jerome Powell reiterated his hard-line, hawkish stance. In the name of fighting inflation, he continues to maintain a high federal funds rate and quantitative tightening in the face of a slowing US economy.
For most of the 2010s, market participants enjoyed the luxury of very low interest rates and quantitative easing by the Federal Reserve (and most of world’s major central banks). In recent years, as you may have noticed, things could not be more different.
Instead of a tailwind, many investors are now facing multiple headwinds in the form of high interest rates, sticky high inflation, a stronger dollar, and dissipating liquidity. I don’t expect these conditions to change until the Fed is forced by an unstable bond market to alter its hawkish course.
Investing wisely with a diverse collection of great assets and trailing stop losses should prove to be a shrewd course of action during this new financial and geopolitical paradigm. Below, you can read about the actions we have taken within our portfolios over the past several weeks.
The graph below depicts weekly US net liquidity (blue line) and major world bank approximate M2 money supply (gold line at bottom, “Global Net Liquidity”) since the beginning of May 2023, compared with the 10 largest long Vailshire portfolio holdings of: Adobe Inc. (ticker: ADBE), AutoZone, Inc.(AZO), large cap stocks with high FCF yields ETF (COWZ), Alphabet Inc. (GOOGL), Mastercard Inc. (MA), MercadoLibre Inc. (MELI), NVR Inc. (NVR), Occidental Petroleum Corp. (OXY), Texas Pacific Land Corp. (TPL), and Tesla Inc. (TSLA). — Note that US net liquidity has contracted by -4.4% and approximate global M2 has declined by -7.6%. — The best performers include TSLA (47.1%) and ADBE (46.4%), while AZO (-5.6%) and NVR (1.9%) have relatively underperformed.
Strategies for Vailshire’s SMAs
During the month of September, we made multiple small moves. Many megacap tech companies were added, but at smaller than usual position sizes, since they are showing mildly weakened short-term momentum. Medium-term momentum, however, remains robust across most of these businesses.
Our oil and gas stocks (OXY and TPL) continue to flourish based on the strong price momentum of their underlying commodity: oil. I expect these assets to be star performers over the coming decade.
On the Sound Money side of our portfolios, gold continues to languish in the setting of rising real interest rates… so we remain stopped out of our premiere gold royalty and streaming company: Franco-Nevada (FNV). As real interest rates level off and eventually start to fall, I expect gold to appreciate materially.
Likewise bitcoin, “the great absorber of liquidity,” continues to reel from the above-mentioned contraction in global M2 and US net liquidity. In light of this, we were stopped out of our bitcoin proxies (for a nice profit) several weeks ago and remain on the sidelines for the time-being. — As an aside, very short-term momentum is starting to recover since China re-started their own quantitative easing actions and our bitcoin proxies are back on the cusp of “buy” mode.
In our Moderate and Aggressive portfolios, we also added short (hedge) positions for the first time in several months, which have shown strong short-term momentum and are described below.
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%)
- 1.67% AAPL (2/3 position size)
- 1.67% ADBE (2/3 position size)
- 1.67% AMZN (2/3 position size)
- 5% AZO
- 1.67% CALF (2/3 position size)
- 3.33% COWZ (2/3 position size)
- 2.5% GOOGL
- 0% LMT (stopped out)
- 2.5% MA
- 2.5% MELI
- 1.67% MSCI (2/3 position size)
- 1.67% MSFT (2/3 position size)
- 1.67% NVDA (2/3 position size)
- 3.33% NVR (2/3 position size)
- 2.5% OXY
- 1.67% SHOP (2/3 position size)
- 5% TPL
- 2.5% TSLA
- 1.67% TT (2/3 position size)
- 1.67% V (2/3 position size)
HEDGES
- 3.33% PSQ (1/3 position size)
- 6.67% RWM (2/3 position size)
- 3.33% SH (1/3 position size)
- 3.33% SJB (1/3 position size)
SOUND MONEY (40%)
- 0% FNV (gold royalty; stopped out)
- 0% MSTR (bitcoin proxy; stopped out)
- 0% WGMI (bitcoin miners; stopped out)
- 40% cash
Vailshire’s Moderate separately managed accounts (SMAs) are allocated as follows (current base % position size):
EQUITIES (60%)
- 1.67% AAPL (2/3 position size)
- 1.67% ADBE (2/3 position size)
- 1.67% AMZN (2/3 position size)
- 5% AZO
- 1.67% CALF (2/3 position size)
- 3.33% COWZ (2/3 position size)
- 2.5% GOOGL
- 0% LMT (stopped out)
- 2.5% MA
- 2.5% MELI
- 1.67% MSCI (2/3 position size)
- 1.67% MSFT (2/3 position size)
- 1.67% NVDA (2/3 position size)
- 3.33% NVR (2/3 position size)
- 2.5% OXY
- 1.67% SHOP (2/3 position size)
- 5% TPL
- 2.5% TSLA
- 1.67% TT (2/3 position size)
- 1.67% V (2/3 position size)
HEDGES
- 3.33% PSQ (1/3 position size)
- 6.67% RWM (2/3 position size)
- 3.33% SH (1/3 position size)
- 3.33% SJB (1/3 position size)
SOUND MONEY (40%)
- 0% FNV (gold royalty; stopped out)
- 0% MSTR (bitcoin proxy; stopped out)
- 0% WGMI (bitcoin miners; stopped out)
- 40% cash
Vailshire’s Conservative separately managed accounts (SMAs) are long-only and are allocated as follows (current base % position size):
EQUITIES (60%)
- 1.67% AAPL (2/3 position size)
- 1.67% ADBE (2/3 position size)
- 1.67% AMZN (2/3 position size)
- 5% AZO
- 1.67% CALF (2/3 position size)
- 3.33% COWZ (2/3 position size)
- 2.5% GOOGL
- 0% LMT (stopped out)
- 2.5% MA
- 2.5% MELI
- 1.67% MSCI (2/3 position size)
- 1.67% MSFT (2/3 position size)
- 1.67% NVDA (2/3 position size)
- 3.33% NVR (2/3 position size)
- 2.5% OXY
- 1.67% SHOP (2/3 position size)
- 5% TPL
- 2.5% TSLA
- 1.67% TT (2/3 position size)
- 1.67% V (2/3 position size)
- 14.14% cash
SOUND MONEY (40%)
- 0% FNV (gold royalty; stopped out)
- 0% MSTR (bitcoin proxy; stopped out)
- 0% WGMI (bitcoin miners; stopped out)
- 40% cash
Vailshire’s Ultra Conservative separately managed accounts (SMAs) are long-only and are allocated as follows (current base % position size):
EQUITIES (60%)
- 1.67% AAPL (2/3 position size)
- 1.67% ADBE (2/3 position size)
- 1.67% AMZN (2/3 position size)
- 5% AZO
- 1.67% CALF (2/3 position size)
- 3.33% COWZ (2/3 position size)
- 2.5% GOOGL
- 0% LMT (stopped out)
- 2.5% MA
- 2.5% MELI
- 1.67% MSCI (2/3 position size)
- 1.67% MSFT (2/3 position size)
- 1.67% NVDA (2/3 position size)
- 3.33% NVR (2/3 position size)
- 2.5% OXY
- 1.67% SHOP (2/3 position size)
- 5% TPL
- 2.5% TSLA
- 1.67% TT (2/3 position size)
- 1.67% V (2/3 position size)
- 14.14% cash
SOUND MONEY (40%)
- 0% FNV (gold royalty; stopped out)
- 0% MSTR (bitcoin proxy; stopped out)
- 0% WGMI (bitcoin miners; stopped out)
- 40% cash
Vailshire’s Bitcoin Proxy separately managed accounts (SMAs) are allocated as follows (current base % position size):
- 0% MSTR (bitcoin proxy; stopped out)
- 100% 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. Our legal team is doing everything in its power to get this approval as quickly as possible. I am sorry for the ongoing delay in trading/investing for Vailshire’s FL and TX clients!
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
US Small Cap Stocks Looking Bearish
Graph (above): US small cap stocks (ticker: IWM) are showing bearish momentum in the short-term, allowing us to increase our portfolio hedge in recent weeks. If the market continues to roll over, our hedge (small cap inverse ETF) should provide profitable downside protection.
Similar to last month, liquidity and worldwide M2 continue getting methodically removed from the financial system… and bitcoin and risk assets are responding in kind.
Many of our portfolio holdings have hit different trailing stop losses, which means our interest-earning cash positions have been increasing as well. Earning nearly 5% from Interactive Brokers while the market decides on a direction is not a bad place to be… all things considered!
The recent surge in Chinese liquidity has already been sniffed out by bitcoin, which is starting to show very early signs of life. Whether sooner or later, once the next bitcoin bull market gets started again in earnest, we will be more than happy to be along for the ride.
Whatever happens, we are prepared.
I appreciate you and the confidence you have placed in Vailshire to manage your hard-earned capital.
Living well and investing wisely with you,
Jeff Ross, MD/MBA