Here is an example of a weekly commentary that I wrote a few weeks ago. Particularly I was drawing attention to the strong dollar that was about to play out and how emerging markets were growing in risk exorbitantly UUP/ EEM. Every member of the SWP and AWAKE receives this every week on Tuesday, except for the week of the live Monthly meeting. I always make it a point to include a topic of interest that is relevant in the macro-economic landscape we are in currently.
The Sleep Well Portfolio at a Glance
Listening to the Market
SPY (Large Caps)
TLT (Bonds)
GLD (Consumer Goods Inflation)
UUP (US Dollar Relative Deflation)
IWM (Small Caps)
EEM (Emerging Markets/ Relative Inflation)
Drivers for Current Portfolio Allocation
The SWP is doing what is does best, relaxing as geopolitical issues are sparked and corrections are raging in nearly every equity market around the globe. AWAKE had a great week with its concentrated allocation and leverage. We didn’t need to know the future we just needed to listen to the market. Risk parity, the 60/40, Small caps, the Nasdaq, and even the S&P have all corrected beyond the levels of the SWP. We have always and will always be the top performer vs Risk Parity and 60/40, but the S&P can have its days of outperformance. Those days are not today as we take back over the top spot. Over the coming months our gap will likely widen as the SWP pushes into places Equities just can’t go.
The S&P is testing the lows that have been put in place since September of last year. The S&P has now gone into correction territory and will likely draw in some new buy the dippers that have been sitting on the sideline. If the lows are breached That are likely to slide fast.On a technical note… We have officially made a very nice-looking head and shoulders on the S&P. Once the lows are breached, targets are another 10% down from current levels. If the lows are breached then broken to the upside, the pattern becomes one of the strongest technical setups in technical analysis.
While I use price action in modeling it is only one element of risk management. Much like Buffet and Munger look for good value, they also look at management and liquidity. New lows are a seductive thing in bear markets, they are also like running your hand with the grain of a piece of wood. It feels smooth and safe, until a splinter digs in and causes unnecessary pain. Wait for the sanding to be finished and we will have all the safety we want. For now, the rough spots are still poking out.
Weekly Topic of Interest
US Hawks + Euro Doves = Strong Dollar
What is with all this talk about Doves, Hawks, and Rates? This is the world that we live in when currencies are allowed to float. A floating currency is one that is not backed by any physical asset. In the past we had a gold-backed currency, now we have what is called a fiat currency.
Fiat currencies have a significant advantage over a physically backed gold currency. They can be inflated without the immediate arbitrage of the backed asset. When a currency is backed by a physical asset or a limited supply, the currency runs net neutral. This means it will never inflate or deflated over time.
[IMG alt="Chart
Description automatically generated"]https://s3-us-east-2.amazonaws.com/f1.aeromir.com/2/2022/02/1645634215033.png[/IMG]
CPI-U (all urban consumers, U.S. cities average) data from Department of Labor / Bureau of Labor Statistics
As a saver this is a great thing. We would have the ability to store our money and never lose any value in the future. As an economist, this is a scary thing. It creates major swings in investing and saving. When growth is positive it spurs investing and growth in the economy is officially accelerating. But if growth even slightly slows then, quick save it.
In a commodity backed currency economy the government is at the will of the business cycle. Good, bad and ugly. This is because if the government attempts to print or drop interest rates below inflation, investors and foreign banks will exchange the currency into the commodity. As people dump the currency the commodity strengthens. As the commodity strengthens the currency weakens further. It turns into a runaway freight train.
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Runaway freight trains are not a fun thing when the economy is in a freefall. This is what happened in the great depression. Looking at inflation through history we can see huge cycles of inflation and deflation before eventually gaining control of the dollar after the 80s.
Today we have the other extreme… a fiat currency that can devalue vs commodities at will, but vs other currencies it gains strength. Its a world of currency wars. If a government wants to stimulate their country’s economy with inflation it will weaken on the world stage. This makes that country’s goods and services cheaper relative to foreign capital markets. Money follows the best deal, right?
Due to the Dollar being the most stable currency, we live in a world of relativity. We can attempt to weaken the dollar, but other countries will follow. This will eliminate the competitive advantage of inflation. What to do then? Like we saw in Covid… hit it hard, hit it fast. Print, drop rates, and send check faster than other countries and with greater magnitude.
The stimulation might be short-lived, but it will be effective until other countries catch on and print in kind. Then we are left with a massively inflationary world vs hard asset. Welcome to the world of everything getting more expensive. This is the point at which commodities and finite resources reign king.
In response to inflation the US government must raise interest rates to pull dollars out of the economy and reduce inflation. By doing this we inevitably make our goods and services more expensive on the world stage. Buying anything dollar-based is going to be insanely expensive vs alternative countries.
Now we are left with the choice of killing American production or inflation the Nth degree. For now, it looks like we “The Fed” are going to attempt to raise interest rates but that will begin the expense of American-based goods and services.
The Euro Union is looking to remain less hawkish, by doing so it will gain a competitive advantage over the US for services that are of equal value. Not to mention any other country that has a weaker currency.
The US has some tricks up its sleeve, and we will talk about that more next week. for now, we are setting the base for what the Federal Reserve is about to do and how they are going to deal with the aftermath. This is of course if we make it to rate hikes. The economy is slowing, and stocks are correcting even before we have lift off.
Wrap Up
We have been seeing major selling in bonds over the last few months. The reason I can say that is we can look at interest rates. As interest rates rise along the yield curve is signals price depression in bonds. similar to selling in equities pushes prices down.
With all this selling where is the money going? Typically, we would see it go into equities. Overall, we have had positive net capital inflows into the US. The scary thought is what happens when bonds go positive, what will happen to equity markets then. If Equity markets can’t stay up with positive cash flows now with crashing bonds, what will it look like when we have inflows into bond markets rather than equities... its looking trepidatious.
[IMG alt="Chart, waterfall chart
Description automatically generated"]https://s3-us-east-2.amazonaws.com/f1.aeromir.com/2/2022/02/1645634215120.png[/IMG]
We have seen some oversold signals developing across equity markets for the short term. We are still looking for signals that say bonds have stopped their descent, and gold is breaking out. The call right now is more chop and slop until bonds rally. Once we see bonds rally, they will dominate the capital markets and a capitulation or crash will transpire in equities, marking our short-term bottom. For now, it is still patience and holding Gold and Dollars that dominate the portfolio.
May your assets grow and you Sleep Well,
Wayne Klump
The Sleep Well Portfolio at a Glance
Listening to the Market
SPY (Large Caps)
- All last year we had the street buying large caps on every dip. The street is net long large caps after the buying frenzy of 2021. Now that the tide is going out, we are starting to see who was swimming naked. Leverage in risky assets is always the first to go, Bitcoin. Then as the pain continues the net long positions are next to go. This will be the large-cap selling frenzy. We have yet to have any meaningful capitulation in SPY. Lots of downside able to crystalize in the Q2.
- One Month Risk Calculation – Risk Unchanged
TLT (Bonds)
- Finally, a bottom! Rates stopping right on cue with the Ukraine geopolitical backdrop in full swing. With inflation still high and real rates very negative, longer duration is a better buy. TLT will likely stop dropping and provide us with a nice base to measure from. We have a long way to go before a buy signal with inflation at +7% but, it’s a start.
- One Month Risk Calculation – Risk Decreasing
GLD (Consumer Goods Inflation)
- It’s no secret that I am a fan of gold during slowing growth times. Well, I am an even bigger fan when inflation is above +4%. Then to top it all off I am even a bigger fan when there is a threat of war. To be clear, I believe that disputes can be resolved without the loss of life, but if it is going to happen, as an investor I need to be positioned for it. Gold is a great asset to hold for now. Gold is at the top end of its short-term range and will likely chop or even pull back a little from these levels, but remains very bullish in the current macro environment.
- One Month Risk Calculation – Risk Unchanged
UUP (US Dollar Relative Deflation)
- The Fed raising rates into a slowdown + European interest rate hikes now being subdued + slowing inflation = stronger dollar in Q2. UUP is among the top assets to hold during this next quarter.
- One Month Risk Calculation – Risk Decreasing
IWM (Small Caps)
- Small caps have been stabilizing over the last few weeks. With this stabilization, we are seeing in IWM lead us to assume that buyers are looking for value now. With IWM being down over -17% from its highs it does have better valuations than SPY. If someone is attempting to buy this dip it will most likely be in small caps. We are still on the sidelines for IWM, but just like TLT it’s a beginning. With lots more downside over the next quarter IWM will likely fall further just not as fast relative to SPY or QQQ.
- One Month Risk Calculation – Risk Unchanged
EEM (Emerging Markets/ Relative Inflation)
- If I wasn’t clear enough the last few weeks, RUN! EEM is a very challenging asset in rising Dollar times and our models are extremely bullish on the Dollar. This last week EEM has corrected from the downtrend upper resistance. It is likely the downtrend will continue or even accelerate to the downside over the next few months.
- One Month Risk Calculation – Risk increasing.
Drivers for Current Portfolio Allocation
The SWP is doing what is does best, relaxing as geopolitical issues are sparked and corrections are raging in nearly every equity market around the globe. AWAKE had a great week with its concentrated allocation and leverage. We didn’t need to know the future we just needed to listen to the market. Risk parity, the 60/40, Small caps, the Nasdaq, and even the S&P have all corrected beyond the levels of the SWP. We have always and will always be the top performer vs Risk Parity and 60/40, but the S&P can have its days of outperformance. Those days are not today as we take back over the top spot. Over the coming months our gap will likely widen as the SWP pushes into places Equities just can’t go.
The S&P is testing the lows that have been put in place since September of last year. The S&P has now gone into correction territory and will likely draw in some new buy the dippers that have been sitting on the sideline. If the lows are breached That are likely to slide fast.On a technical note… We have officially made a very nice-looking head and shoulders on the S&P. Once the lows are breached, targets are another 10% down from current levels. If the lows are breached then broken to the upside, the pattern becomes one of the strongest technical setups in technical analysis.
While I use price action in modeling it is only one element of risk management. Much like Buffet and Munger look for good value, they also look at management and liquidity. New lows are a seductive thing in bear markets, they are also like running your hand with the grain of a piece of wood. It feels smooth and safe, until a splinter digs in and causes unnecessary pain. Wait for the sanding to be finished and we will have all the safety we want. For now, the rough spots are still poking out.
Weekly Topic of Interest
US Hawks + Euro Doves = Strong Dollar
What is with all this talk about Doves, Hawks, and Rates? This is the world that we live in when currencies are allowed to float. A floating currency is one that is not backed by any physical asset. In the past we had a gold-backed currency, now we have what is called a fiat currency.
Fiat currencies have a significant advantage over a physically backed gold currency. They can be inflated without the immediate arbitrage of the backed asset. When a currency is backed by a physical asset or a limited supply, the currency runs net neutral. This means it will never inflate or deflated over time.
[IMG alt="Chart
Description automatically generated"]https://s3-us-east-2.amazonaws.com/f1.aeromir.com/2/2022/02/1645634215033.png[/IMG]
CPI-U (all urban consumers, U.S. cities average) data from Department of Labor / Bureau of Labor Statistics
As a saver this is a great thing. We would have the ability to store our money and never lose any value in the future. As an economist, this is a scary thing. It creates major swings in investing and saving. When growth is positive it spurs investing and growth in the economy is officially accelerating. But if growth even slightly slows then, quick save it.
In a commodity backed currency economy the government is at the will of the business cycle. Good, bad and ugly. This is because if the government attempts to print or drop interest rates below inflation, investors and foreign banks will exchange the currency into the commodity. As people dump the currency the commodity strengthens. As the commodity strengthens the currency weakens further. It turns into a runaway freight train.
Runaway freight trains are not a fun thing when the economy is in a freefall. This is what happened in the great depression. Looking at inflation through history we can see huge cycles of inflation and deflation before eventually gaining control of the dollar after the 80s.
Today we have the other extreme… a fiat currency that can devalue vs commodities at will, but vs other currencies it gains strength. Its a world of currency wars. If a government wants to stimulate their country’s economy with inflation it will weaken on the world stage. This makes that country’s goods and services cheaper relative to foreign capital markets. Money follows the best deal, right?
Due to the Dollar being the most stable currency, we live in a world of relativity. We can attempt to weaken the dollar, but other countries will follow. This will eliminate the competitive advantage of inflation. What to do then? Like we saw in Covid… hit it hard, hit it fast. Print, drop rates, and send check faster than other countries and with greater magnitude.
The stimulation might be short-lived, but it will be effective until other countries catch on and print in kind. Then we are left with a massively inflationary world vs hard asset. Welcome to the world of everything getting more expensive. This is the point at which commodities and finite resources reign king.
In response to inflation the US government must raise interest rates to pull dollars out of the economy and reduce inflation. By doing this we inevitably make our goods and services more expensive on the world stage. Buying anything dollar-based is going to be insanely expensive vs alternative countries.
Now we are left with the choice of killing American production or inflation the Nth degree. For now, it looks like we “The Fed” are going to attempt to raise interest rates but that will begin the expense of American-based goods and services.
The Euro Union is looking to remain less hawkish, by doing so it will gain a competitive advantage over the US for services that are of equal value. Not to mention any other country that has a weaker currency.
The US has some tricks up its sleeve, and we will talk about that more next week. for now, we are setting the base for what the Federal Reserve is about to do and how they are going to deal with the aftermath. This is of course if we make it to rate hikes. The economy is slowing, and stocks are correcting even before we have lift off.
Wrap Up
We have been seeing major selling in bonds over the last few months. The reason I can say that is we can look at interest rates. As interest rates rise along the yield curve is signals price depression in bonds. similar to selling in equities pushes prices down.
With all this selling where is the money going? Typically, we would see it go into equities. Overall, we have had positive net capital inflows into the US. The scary thought is what happens when bonds go positive, what will happen to equity markets then. If Equity markets can’t stay up with positive cash flows now with crashing bonds, what will it look like when we have inflows into bond markets rather than equities... its looking trepidatious.
[IMG alt="Chart, waterfall chart
Description automatically generated"]https://s3-us-east-2.amazonaws.com/f1.aeromir.com/2/2022/02/1645634215120.png[/IMG]
We have seen some oversold signals developing across equity markets for the short term. We are still looking for signals that say bonds have stopped their descent, and gold is breaking out. The call right now is more chop and slop until bonds rally. Once we see bonds rally, they will dominate the capital markets and a capitulation or crash will transpire in equities, marking our short-term bottom. For now, it is still patience and holding Gold and Dollars that dominate the portfolio.
May your assets grow and you Sleep Well,
Wayne Klump