Performance Report: 08/31/2022
All performance data for our strategies is net of all fees and expenses. All performance data for indexes or other securities is from sources we believe to be reliable. All data is as of 08/31/2022.
After a remarkable start to the year, the last several months have been tough. While we are still faring better than traditional investment strategies, I have allowed our early YTD gains to evaporate and now we're down for the year. I'm frustrated in allowing this to happen and I'm working tirelessly to correct it. When I implemented the MAP, I knew that gains would come in “fits and starts” but I am unhappy with how we have suffered multi-month declines both last year and this year. In time, we'll have another strong run and our accounts will overcome our high watermark. But I'm not satisfied with where we stand today.
While the capital markets have been challenging with nothing appreciating in a consistent or meaningful way the past several months; invariably, my first job is to protect your capital and then find ways for it to appreciate when possible. And while appreciation may not have been possible the past few months, protecting capital is always an option. And in that respect, I have failed to do my job. I am not satisfied with where we are at and I'm committed to doing better. Ultimately, I am responsible for how your account performs and I am working day and night to remedy the situation. I will address my solution with you via e-mail later in the month. I am close to a solution but I still have some work to do on it.
I have previously shared the idea that a 7-year debt cycle has been in existence for over 100 years in the US and on many occasions, equity and bond markets have fallen victim to this cycle. (If you are not familiar with this commentary, you can read about it here.) As I read Ecclesiastes this month, another time-related pattern came to mind and I am anxious to share it with you. Most of you are familiar with the famous passage below from Ecclesiastes 3, or at least you are familiar with the song by the Byrds, "Turn, Turn, Turn", based on the passage.
For everything, there is an appointed time,
and an appropriate time for every activity on earth;
A time to be born, and a time to die;
a time to plant, and a time to uproot what was planted;
a time to kill and a time to heal;
a time to break down, and a time to build up;
a time to weep, and a time to laugh;
a time to mourn, and a time to dance.
A time to throw away stones, and a time to gather stones;
a time to embrace, and a time to refrain from embracing;
a time to search, a time to give something up as lost;
a t time to keep, and a time to throw away;
a time to rip, and a time to sew;
a time to keep silent, and a time to speak.
A time to love, and a time to hate;
a time for war, and a time for peace.
As I read this passage, I realized that capital markets have different seasons. Some seasons are good, some bad. Further, it occurred to me that historically, the good times and the bad times tend to run in 10-year cycles. Every decade seems to be dominated by an overarching theme. An idea or a trend that serves the entire 10-year period.
The 2010’s were dominated by Quantitative Easing (QE). This was a time to be heavily invested in equities and bonds. The stock market experienced an uninterrupted upward trajectory. Gains during this 10-year span were in excess of any other decade, there really isn’t a close second. It was the longest period of economic expansion in US history. While stocks largely went up unabated, bonds provided a nice cushion anytime the stock market was tripped up. Inflation was not only a non-factor in the economy, it was essentially relegated as a footnote in the history books.
The dominant theme of the 2000’s was a volatile battle between deleveraging and releveraging. It was time to be nimble across all capital markets. The battle of leverage manifested itself in a volatile trading range for the S&P 500 between 1500 and 700. Twice the stock market fell 50% which had not happened in a single decade since the Great Depression. Commodities, which had been in a deep slumber for nearly two decades finally woke up. Tangible products like oil and corn outperformed the stock market indexes many times over. The overturning of Glass-Steagall in December of 1999 coupled with the “Greenspan Put” meant Wall Street could and would find new and creative ways of leveraging capital markets which would then subsequently collapse. Enron, Tyco, Worldcom, and the entire 2008 Financial Crisis would have easily been prevented by Glass-Steagall.
The 90’s were defined by the emergence of the internet and the “New Economy”. It was a time to be invested in anything intangible. The internet went from a patchwork of chat rooms dominated by computer geeks to becoming ubiquitous across all of society, worldwide. I graduated from college in 1995 without ever being assigned an e-mail. By the year 2000, I had several e-mail accounts, Tom and I became friends on Myspace and I would be in contact with the “world-wide-web” on a daily basis. Consequently, the entire world changed radically, increasing productivity many times over.
The 80’s were defined by globalization and automation. It was a time to be invested in the emerging economies in the Far East, especially Japan. In 1980 our family bought our first Japanese-manufactured car, much to the chagrin of my grandfather who was stationed in the South Pacific during WWII. By the end of the 80’s, it was feared that Japan would rule the world and own every inch of real estate in the contiguous 48 states. In 1980, Wall Street brokers couldn’t spell KAIZEN, by 1990 they were murmuring it in their sleep.
Stagflation ruled the day in the 1970’s. It was a time to be invested in anything tangible, commodities, real estate, ect. The value of the USD collapsed. Nixon nixed the gold standard in 1971 after France had exchanged their paper US dollars for physical gold over the prior years. The Oil Crisis took place in 1973. The decade ended in 1979 with the Hunt Brothers cornering the silver market (The SEC subsequently busted their trade by significantly raising margin rates causing the biggest and most significant margin call in world history). Interest rates went sky high as did the price of nearly everything.
The 60’s were defined by social unrest which provided the economy a great assist as women and minorities become a constructive part of the US economy. Productively in the US grew by leaps and bounds as a result of previously marginalized citizens now being valuable contributors. Stocks largely appreciated with some major hiccups as the US experienced social and economic growing pains. Another significant development was the US initiating a foreign war putting our nation’s currency in jeopardy, which in no small part led to the 70’s stagflation.
The 50’s was a booming time. We had the Baby Boom and an economic boom. There was a mass exodus out of cities into the suburbs. Highways, jet travel, and the ubiquity of the automobile made America traversable. And if you didn't want to go out into the world, the television brought the world into your living room. The Baby Boom created considerable economic activity. Soldiers coming back from war were unleashed into the workforce, many benefiting from the GI bill. We had a cold war but a hot stock market. It was a time to be invested in the American Miracle as the US became the preeminent economy in the world. The US stock market grew largely uninhibited as it shook off global fears in favor of domestic growth.
The 1940’s were obviously defined by WWII and the subsequent reconstruction effort. Capital markets did well but not many people outside of New York noticed. Inflation was high yet interest rates were low. It was a time for patriotism. For men to go to war and women to go to work. And once the war was over, it was time to make babies, which led to the Baby Boom and suburbanization of the 1950’s.
The 1930’s were defined by the Great Depression. Stocks fell and fell hard the entire decade. In the first few years of the 30’s stocks fell over 75% and then fell again more than 50% in just 18 months starting in 1937. It was a time when the economy went into deflation, stocks and commodities deleveraged, and widespread wealth was destroyed.
The Roaring ‘20’s was a decade-long period of financial debauchery. Stocks went up and then went up some more. Even a depression in 1921 and two more subsequent recessions couldn’t stifle the stock market. The newly minted Federal Reserve system printed money beyond what they should have been allowed while providing artificial support to various markets to keep the “good times rolling”. Unfortunately, financial debauchery led to economic decadence as stocks crashed leading into the 1930’s.
The 1910’s was a time of transition defined by the creation of the 3rd US Central Bank, yet the 1st to have a permanent charter. Despite no new major banking panics during the decade, the panics from the prior two decades were at the forefront of everyone’s mind. US citizens were scared and looking for a financial savior. To that end, the Federal Reserve System (FED) was conceived and created, albeit under auspicious circumstances. The FED was conceived in late 1910, approved by Congress on Christmas Eve 1913, and finally up and running in late 1917. And by end of the decade, the FED had already successfully engineered its first financial depression. It was a messy time when stocks didn’t do much of anything. While the moves in the capital markets were hardly significant, the creation of the FED would be the most significant move for the capital markets for the next 100 years. Over the next century, a privately held bank primarily owned by Wall Street firms would be given full authority to issue and control our nation’s currency while continuously engaging in financial engineering to manipulate capital markets. (And practically every seven years like clockwork, their financial engineering would fail in spectacular fashion!)
The 1900’s were defined by a string of banking Crisis’s. In 1901, 1907 and 1910, the US experienced significant economic contraction due to various banking panics. The 1907 Panic gets most of the publicity but the others were significant as well. The economy spent half the decade in contraction. Banking confidence was destroyed. This was a time to take your money and bury it in a coffee can in the backyard.
I could keep going but I feel like I’ve made my point. So it is, that each decade seems to be “an appointed time” for the capital markets to behave in their own peculiar way. No two decades look alike. They are all unique in their very own respect.
What will the 2020's look like? What dominant trend or theme will emerge? I can’t say because I don’t know. I doubt anyone could have guess what would transpire over the next ten years at the beginning of any decade. But what I do know is in every single decade, what worked over the prior 10 years didn’t work over the subsequent 10 years. I know this decade will require a much different approach. And thus far, my approach has worked better than most.
During the first few years of this decade, we have seen several different themes emerge.
First, there have been incredible bouts of deleveraging and releveraging. What the stock market accomplished from April of 2020 through December of 2021 was utterly preposterous. And given that there have been two bear markets in a span of just 24 months is unprecedented. The speed and volatility of capital markets have grown exponentially since the FED went all-in on QE. Could the “yin and yang” of fiscal malfeasance versus economic fundamentals continue to cause nauseating moves in the capital markets?
Second, we have seen a stock pickers market. As the economy came out of Covid, some stocks generated obscene returns. On occasion, there were broad-based gains but more often than not, the market belonged to the stock pickers. And now meme stocks with seemingly no fundamental value are rocketing higher and then crashing with an equal amount of gusto. The last decade belonged to the passive index investors but this decade does not appear to be playing out the same.
Third, there has been significant inflation. The highest inflation readings in the US in a generation. The FED fought inflation for a decade by manipulating commodity futures markets. Will the physical demand for tangible goods overwhelm Wall Streets efforts to contain prices in intangible capital markets?
Fourth, there have been major players in the global market that are moving away from the US Dollar (USD), once the de factor worldwide reserve currency. Russia started selling their USD holdings at the onset of this decade. Putin only initiated his invasion of Ukraine once their USD holdings were fully liquidated. Now, China is reducing its exposure to the USD. India is restricting exports that are priced in USDs. How long can the USD retain its status as the world’s reserve currency? What happens in the US when we can no longer export monetary inflation?
There are other themes that could take hold. Does Crypto emerge as a legitimate currency option? Or do other government backed-digital currencies become mainstream? Does the entire world “go green”? Does the political divide splitting our nation lead to more significant divisions?
Again, I don’t know what becomes the prevailing trend in the coming eight years. But this I do know. My MAP system keys off of a predictable human behavior. And what hasn’t changed in 10,000 years of human history is greed and fear. These two emotions dominate human behavior in the capital markets. And I believe the MAP will continue to properly identify key inflection points in various securities by keying off these human emotions.
I believe we are fairly well positioned to take advantage of any of the themes I mentioned above.
- My approach to risk management should significantly dampen the impact of volatility.
- Over 80% of our securities are individual stocks so I am already engaged in stock picking.
- We have commodity exposure for inflation as well as numerous commodity-related individual stocks.
- We have international bond funds, precious metals, as well as a handful of international securities which all stand to benefit from a falling USD.
Crypto would be the only theme I mentioned above that we do not have exposure to. As of now, I am not a believer in Crypto and until I see it move contrary to the US Equity and Bond markets, I likely won't change my view on it. Of course, our custodian, Interactive Brokers, has an easy and efficient means of buying Crypto so if it is something you want to buy, we can easily buy it in your account.
I do believe the MAP needs to be tweaked so that it can be more effective in this highly volatile market. And I am working day and night at it. I will update you on how I have updated it later this month. I am getting close but I’m not quite there yet.
As always, please do not hesitate to call me at 512-553-5151 if I can be of assistance.
1) Inception date of 4/30/2019
2) All benchmark prices are obtained through the Yahoo!Finance website. S&P 500 Index is calculated using the index price. AOM is the iShares Core Moderate Allocation ETF. Global Balanced is calculated using a 40% allocation to SPY, 40% allocation to BND and a 20% allocation to IEFA.