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Strategy and portfolio composition


Macroeconomic view strategy and portfolio composition.

In this article I will lay out my thinking and strategy behind the portfolio and its current composition.

So before I get into the specifics of the portfolio let’s establish my macroeconomic (top down) viewpoint.

It's no secret, and hasn’t been for a long time, that I am bearish on the the US economy and therefore, to some extent, the world economy also.

2017 saw an incredible bull run in an already aged bull market and it was clear to even a bear like me that one should be buying US stocks, so I did and did well out of it.

However that behaviour did not reflect my long term view which is now the one that takes precedent and has done so since the DOW and the S&P 500 fell in January and have yet (6 months later) to post new highs, unlike the Nasdaq which is still subject to extreme complacency in the form of the tech bubble which has risen to values multiple times higher than even the one in 2000.

This does not mean to say that there will not be one more melt up in the markets before it crashes, that is still a possibility, but regardless of whether that happens or not I think we are getting towards what I call the “end of it” and so my strategy has shifted to a long term outlook and capital preservation.

So lets outline the issues and core points which underline my thinking, approach and asset selection.

My main concerns regarding the US economy in brief summary are the following:

  • Rising Inflation in US and throughout the globe.

  • Record budget deficits amounting to $1.2 Trillion a year (likely to grow bigger due to military spending and infrastructure rebuilding).

  • US national debt at $21 Trillion and growing at the aforementioned deficit (annually).

  • Record mortgage debt.

  • Record automobile debt.

  • Record student loan debt.

  • Record credit card debt amounting to over $1 trillion alone.

  • Reduced government revenues due to tax cuts.

  • Massively inflated stock market valuations

  • Massively inflated housing market valuations

  • Rising yields in bond market (specifically shorter term treasuries resulting in steadily flattening yield curve)

  • Fiscal tightening by federal reserve (reducing money supply)

  • Increasing interest rates, 25 basis points a quarter as average.

  • Current interest financing on US national debt on annual basis is $400 billion and rising.

  • Total US debt when including all forms of debt eg social security, medicare etc amounts to anywhere between $90-$200 Trillion

  • Payout to baby boom generation on social security and 401k about to kick in 2017/18 onwards and there is no money to pay them so it will have to be printed.

  • End of Business cycle (debt cycle, boom bust cycle) average is 7-9 years we are at 9.5.

  • Stock market bull market is second longest in history and has a shot of becoming the longest in US history. This bull market is 9.5 years old and recently showing obvious signs of fatigue. Bull market represents total increase of 325% and can’t last forever.

I wish I had time to cover everyone of these concerns in detail but alas I don't.

However I do intend to write articles covering some of the bigger issues mentioned in detail in future articles for my blog.

The US stock markets (indices) have more than doubled in some cases tripled since 2008, the housing market has more than doubled and in some areas tripled since 2008, some seem to think the valuations are justified but ask yourselves this, has the US economy more than doubled or tripled since 2008? The answer is of course NO!

So amongst all these wild valuations we have to ask ourselves the question, where has all this wonderful “value” been coming from?

Well to answer that we need only ask one more question.

What has doubled or even more than doubled since 2008?

The answer is DEBT.

In 2000 it was a speculative tech bubble in stocks.

In 2008 it was a speculative housing bubble built on debt.

This time the entire US economy is a bubble blown up with debt.

Most people are clueless and seem to think that the current state of affairs is the norm and there is nothing to worry about they say things like “this is how it has always been Tom”.

Well they are wrong, this norm of a debt based economy is not the norm at all and in roughly 5000 years of world economic history has only been the “norm” for roughly the last 50 years or so.

The world's reserve currency, the US dollar, was taken off the gold standard in 1972 by president Nixon partley to pay for the rising costs of the war in vietnam and the obscene nuclear arms race. So instead of being limited by the value of their actual physical wealth/economic growth and other issues of raising capital, they came up with a simple solution, they would just print the money they needed instead. The chinese tried it over a thousand years ago the Romans also did with a physical debasement of their currency and lets not forget the Weimar republic did the same in the 1920’s which lead to hyperinflation, the rise of Hitler, WW2 and 60 million dead. Also more recently Venezuela and Zimbabwe have given it a good ol’ go. Every single attempt to create a fiat currency economy on simply printing the money you want has failed. But of course this time it's different, this time it's going to be fine (said the dog in the burning room) we are too clever and technologically advanced for that to happen to us, yeah right. But enough with the history lesson.

Since then the boom and bust cycle of our debt based fiat currency speculation system has blown up progressively bigger and bigger bubbles.

The scale of these financial disasters (no surprise) increases simultaneously with the increasing levels of debt.

So Tom in order for your portfolio to work, does the world need to end?

A reasonable question but the answer is NO but it might anyway, well our current monetary world but that is a discussion for another article.

Please try to understand this view of the Economy is what I believe are the problems that will eventually bring about its downfall, but eventually is a very loose term and could mean years to come. Also the actual process of decline or collapse could play out over an extended period of time. Maybe even after another crash we will invent another way to re inflate it all again who knows anything is possible.

And so let me explain the reasoning behind the 4 pillars hedge fund.

No one knows exactly what is going to happen in the future but certain things appear self

evident (well at least to me) given the current economic cycle and where we are in it.

  • The Dollar must devalue. It is already in a bear market for the reasons I have already mentioned and we have likely only seen a bear market rally recently. However the core issues remain, increasing fiscal deficits, widening trade deficit, increasing debt, interest finance, rising inflation etc etc the pressure on the Dollar is only going to grow and a resumption of the downtrend is inevitable. In the long tern a massive devaluation is likely. The FED will continue to raise rates for a while but eventually they will put too much pressure on the markets and will have to change course and either freeze or cut rates this will cause the dollar to fall sharply.

  • Capital will move from speculation to value, from worthless to worth it. Assets which retain their value regardless of fiat currency valuations and offer security and safety. Hence GOLD and SILVER. An expensive dollar suppresses the value of these assets but only in relation to that currency, people mistakenly see gold and silver falling in value this is not the case at all, they are simply getting cheaper next to an inflating dollar. When the dollar declines the reverse will be true, and that will likely occur over the coming months. When monetary policy fails and the FED can no longer raise rates they will resort to more QE which will destroy the dollar and send GOLD and SILVER to the moon.

  • The stock market will crash, however the timing of this one is very tricky and so allocation towards short positions on indices accounts for a small sum of total liquidity. The only immediate way I can see to reduce pressure on the equities market would be a rapid devaluing of the dollar. Hence why I mentioned earlier that one more melt up in the markets could still be possible. It is difficult to guess which will come first, markets crash followed by dollar crash or vice versa. However in the long term any fool knows that valuations cannot simply keep increasing but must correct massively to reset accurate valuation of market before next bubble can be blown up.

  • Stocks which are overvalued will be worst hit, stocks which are both overvalued and have poor fundamentals will be annihilated. Stocks which are currently undervalued with sound fundamentals will be least affected and a bonus if they pay you to hold them during a downturn (dividend).

  • Emerging markets are also devaluing as capital moves back to the US dollar temporarily and a more expensive dollar is putting these foreign markets under pressure. But as I have already mentioned this will end and then the opposite will be true. Opportunities to take exposure to emerging markets at reduced valuations are now available and will pay of in the long run. These markets especially those with access to mineral resources eg Brazil, China, Russia, India have far greater potential for future growth than the stagflation economies of the EU and UK for example and the soon to be in crisis US.

  • Crypto. Love it or hate it there is no denying that the only bubble left that has not even been even slightly blown up to maximum potential via institutional investment is the crypto space. Yes we saw a bubble pop in January but this was retail “dumb money” (myself included in that description) The saving grace from a personal perspective was of course all the profits I had made and collected from 2016 to 2018. However weather its the potential of blockchain technology or the fascinating idea of secure token economics and its potential as a growing medium of exchange suggest to me that we haven’t even seen the start of this markets potential to expand in value. With the potential of other asset classes crashing, the value of crypto as a store of wealth in addition to its other potential, means that upside valuations are potentially unlimited in the long term. Perhaps if there is a monetary collapse (worse case scenario) crypto will be the answer, a little far fetched maybe but who knows.

So to sum up the four pillars hedge fund will continue to be built around

  1. The bet against the Dollar and exposure to precious metals.

  2. Exposure to emerging markets.

  3. Long exposure to value equities, Short exposure to overvalued equities.

  4. Exposure to crypto market (speculative growth and potential store of value)

All remaining funds not assigned to these areas will be used for proprietary trades in any asset class over any shorter time horizon.

Now a quick word on recent events and the current state of play.

It's obvious to anyone with a hole in their arse that things have not been going the way I see them currently and the draw down, especially in the crypto trades and forex bets against the dollar, have become severe.

But as I have previously stated it is only draw down and not actual loss. I have no intention of realising these trades into real losses while I am of my previously stated conviction.

But I continue to close profitable trades from my short term trading ideas regularly and continue to realise actual profits from closed trades month over month.

I intend to develop my idea for the portfolio further with time and reallocate amongst multiple assets over time and make additions also such as more diverse emerging market exposure for example.

I also intend to keep up the monthly 5% deposits.

So there you have it that is the way I see things and what you are all betting on if you are copying me.

I ask that you think carefully on this and if you agree or don’t agree with my outlook and then vote with your feet. Backing an idea you don't agree with especially with your own money would of course be foolish.

I am not obsessed with being or even remaining a PI on etoro and will not follow any path just to try and increase copier count, I do however intend to continue my trading there indefinitely so anyone who is copying me can rely on me being around for a long time to come. I am only interested in trading my ideas and doing what I think is going to be best in the long term including what is best for me.

I am, after all, only Human and so could be wrong but I really don't think I am and neither do I think that the issues I have mentioned are part of my imagination but are documented and therefore very real.

Timing is everything they say and that is true to a point, but although I don't agree with the old man on everything (Warren Buffett) I do on one thing and that is in the long term wealth moves from the impatient to the patient.

Take care everyone.


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