| Why become a VIP? Here’s why... An uber-successful money manager told me recently that the number one trait shared by great investors is their willingness to change strategies when they are wrong. With endless amounts of financial data available, it’s easy to seek out only the data that support your premise and to ignore conflicting evidence... And dogmatic investing usually leads to disaster. Take the actions of investors in the aftermath of the 2008 financial crisis for example... Watching the Fed inflate its balance sheet by 130% in just 12 months, many market observers concluded a devastating inflation must follow, which would force interest rates higher toppling the tall tower of government debt. Investors who bought into this binary “If A, then B” analysis made some very bad decisions about their money, avoiding US stock and bond markets in favor of commodities and other inflation hedges. With the S&P 500 up 225% since 2009 and the 10-year yield still 64% below its 40-year average... that would have been a serious misallocation of capital. Besides being wrong, you can be really wrong... Like Long-Term Capital Management wrong... Posting annualized returns of 40%, with $100 billion in assets under management and finance veterans, PhDs, and Nobel Prize winners at the helm, LTCM was destined for greatness... But destiny expired when a strengthening US dollar led to the 1997 Asian financial crisis... which led to the Russian sovereign default... which led to... The takeaway? Investors who fail to pay heed to changing markets are at great risk of making serious investment mistakes. There are steps you can take to ensure your portfolio doesn’t follow the fate of LTCM... but more on that in a moment. First, let’s take a look at some of the major disruptions ahead. A Demographic Debacle: According to Pew Research, 3.5 million Americans turn 65 every year and will do for the next dozen years. At the same time, the CDC found that the US fertility rate is at its lowest point since records began in 1909. This disastrous combination means that those 65 and older will make up over 20% of the population by 2030... while the percentage of working-age cohorts will decline. And with 54% of boomers having less than $50,000 saved for retirement, pension liabilities will increase at the same time that tax revenues decrease as a result of a shrinking labor force. This trend also carries other economic problems. When people enter retirement, their expenditures drop 40% on average. With consumption making up two-thirds of the US economy, this is a major deflationary force. If we see low growth continue, is a 2.2% yield on the 10-Year Treasury a good bet? Of course, that also depends on... What Will The Fed Do?: We learned from the Fed’s March meeting that the board of governors is having a serious discussion about reducing the size of its $4.5 trillion balance sheet. Which means... Every month, about $50 billion in bonds on the Fed’s ledger reach maturity, and the Fed buys new bonds to replace them. The first step will be to let the maturing bonds “roll off” the balance sheet. If this happens, the price of bonds may drop, and interest rates could rise. For all intents and purposes, ‘’normalizing’’ the balance sheet equates to a series of rate hikes. With markets expecting a boost from tax cuts and fiscal stimulus, the Fed risks spoiling the party by tightening faster than expected. While the Fed is tightening, the $18.4 trillion global central bank balance sheet is still expanding by $1 trillion per annum, thanks to the ECB and the BOJ... Will the Fed "go it alone" with its tightening... strong dollar be damned? With wide-ranging implications, monetary policy has the ability to put many a winning portfolio on the wrong side of the market. The Great Automation Reset: Automation and advances in technology are redefining investment selection. What do Tesla (which became America’s largest car maker by market cap in April) and Uber (which is valued at $70 billion in private markets) have in common? Neither make money. Amazon (whose stock price is up 220% since 2015) is now the fourth-largest company in the world by market cap. With a P/E ratio of 187 and a net-profit/sales ratio around one-tenth of Microsoft’s, is it a “buy” at current valuations? The question might seem rhetorical, but it’s not. And here’s why... Over the past century,the technology-adoption cycle has been steadily compressing. While it took approximately 50 years for electricity to be adopted by 60% of US households, (though not shown on the chart) it took smartphones only about five years to achieve the same penetration. Automation and technology will continue to disrupt traditional industries… and consequently investment selection. The question is, will you be the equivalent of an early investor in Amazon? Or the one left holding Kodak? The takeaway? The way these developments play out will alter the investment landscape—and the performance of your portfolio. The good news is, these shifts don’t have to determine your investment success. To quote the stoic master Epictetus: Being a Mauldin Economics reader suggests you already understand the importance of keeping your portfolio on the winning side of unfolding disruption. That’s why we are giving you a limited-time opportunity to become a Mauldin VIP. The Full-Spectrum Solution for Your Portfolio In a minute, I’ll tell you about the very special limited-time opportunity to become a Mauldin VIP. First, however, a word about Full-Spectrum Investing, an approach Mauldin VIPs leverage each and every day—with proven results. If you accept that forecasting the future of financial markets with any kind of certainty isn’t possible… …the only logical approach to successful investing is to select investments using time-tested, disciplined methods. That’s where the Full-Spectrum concept comes in. To show you how it’s being done, let me touch briefly on the work that Mauldin senior editor Patrick Watson does on behalf of subscribers. | 