Greetings from Colorado!
I hope each of you is doing well.
Current Market Conditions
High levels of inflation continue to dominate the headlines, while the world’s economic engine sputters.
The disinflation relief rally in risk assets that began in mid-June from deeply oversold levels came to an abrupt end in mid-August. As a primary example, the S&P 500 (see the accompanying chart) made a run at its own 200-day moving average, before getting soundly rejected. Since that fateful day of peak optimism on August 16, 2022, stocks have resumed their strong bearish downtrend.
While we have yet to receive August inflation numbers, I expect inflation to remain sticky high over the coming months. Related, the Federal Reserve has gotten increasingly hawkish with its rhetoric, vowing to continue raising rates and letting its balance sheet run-off (so-called “quantitative tightening” or “QT”) until inflation returns to “more normal” levels of 2%.
US and international consumers will continue facing high prices for their goods and services across the board. Adding insult to injury, the Fed’s tightening antics (aka, “demand destruction”) in the midst of a rapidly slowing economy mean that millions of Americans will soon be jobless as the inevitable recession takes hold and deepens in the coming months.
It’s already difficult to afford inflated gas and groceries. Imagine how much harder it will be for people who get laid off in the near future. This is the gist of the Fed’s “demand destruction” policies, which will serve to drive down inflation… at the cost of increased human misery and loss of purchasing power.
Going forward, I see an incredibly bearish outcome that loosely follows the path of serious past recessions:
US and international businesses realize sooner than later that we are on the cusp of a serious economic downturn. These companies shift into full survival mode–cutting output, reducing orders, decreasing capital expenditures, and laying off much of their workforce. Banks, for their part, hoard their remaining assets and refuse to lend. Monetary expansion slows precipitously. Liquidity tightens throughout the world. People get scared and sell risk assets in exchange for the US dollar, which strengthens significantly more than it already has. An earnings recession takes hold and stocks melt down. A full recession ensues, unemployment rapidly rises, demand for goods and services is lost as purchasing power is destroyed, and inflation finally eases.
Kudos to the Federal Reserve for initiating this sequence of events!
I wrote that last sentence in jest, of course. For those of us who are paying attention, the coming months and quarters are likely to be quite unpleasant for billions of people around the world.
Not to sound alarmist, but I remain as bearish as I have ever been about the economy in the coming months and quarters. Thankfully, chance favors the prepared.
Strategies for Vailshire’s Separately Managed Accounts
I am frequently asked how to invest during such tumultuous and bearish times. The answer to this question is at the very heart of why I spent several months implementing and honing Vailshire’s long-term trading system.
Our system is unique and proprietary, though not overly complex.
In short, it takes my current macro views and knowledge of historical returns in eras with similar conditions, then couples them together with volatility and momentum-based strategies to earn the best returns… regardless of whether the markets are moving higher or lower.
Said another way, instead of simply buying and holding great assets through bull and bear markets (our past strategy), we now hold assets with the highest potential of generating alpha in bull markets, and selling (or shorting) assets with the highest potential of generating alpha in bear markets.
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
Given the trading and investing limitations of our Conservative accounts, I am not able to actively hedge these portfolios. Therefore, these accounts are predominately in cash, with a concurrent small position in energy-related equities.
Vailshire’s Conservative SMAs have limited (long-only) trading privileges and are currently allocated in the following manner (% base positions):
- 20% energy stocks
- 80% cash
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!
- I enjoyed being a part of the latest Macro Mastermind 3Q 2022 roundtable discussion with Preston Pysh, Jay Gould, and Joe Carlasare. (This was originally recorded on August 8, 2022.)
- On August 13th, Max Wright (aka “Contrarian Dude”) released an interview with me called: Will the Rally Continue? (The Difference Between Bitcoin and Crypto).
- Earlier today (September 1st), I recorded another video interview with Jordan Wirsz, entitled: Macro Economy Update with Dr. Jeff Ross & Jordan Wirsz. I recommend that you watch this 37 minute interview if you’re curious about my most recent macroeconomic thoughts and their investment implications.
Please enjoy!
Conclusion
As stated above, I have never been as bearish about the economy and, related, risk assets as I currently am.
While this can seem troubling for investors on the surface, Vailshire’s proprietary long-term trading system was custom-made for such tumultuous times. Our macroeconomic and momentum-based, quantitative approach should allow us to generate meaningful long-term profits regardless of whether the markets are trending upwards or downwards.
This means that you can rest-assured that your money is being invested wisely in both bull and bear markets over the coming months… and in the years and decades to come!
Living well and investing wisely with you,
Jeff Ross, MD, MBA