Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... My call for "epochal change" is now 2.5 years old.
How is it working out? What are the results?
At the time when I made the call, we were at the height of the prior bull market, and I made a fringe claim - that structural change would define a new economic regime going forward requiring a fundamentally different investment strategy for the next 12-15 years.
Think about what a low probability call that was?!? The odds of it working out were close to zero. The bull market was raging, and buy and hold was profiting.
But these were the facts as I explained them: The bond market was at artificially low interest rates - the lowest in all of recorded history. This implied negative bond returns net of inflation going forward. The stock market was at the highest valuations in all of recorded history, also implying increasing volatility going forward and zero returns net of inflation over a 12-15 year time window. The underlying drivers forcing the investment epoch to change were structural inflation and unsustainable government debt growth. These drivers would convert a historically accommodative Fed into an aggressive Fed - reversing roles from firefighter to arsonist - because it would be forced into "least bad" decision frameworks. The political and economic environment would become more hostile - a political hangover resulting from removing the punch bowl of easy-money, false prosperity from the economic party. From a business perspectve, the deflationary backdrop of offshoring would change into an inflationary backdrop of friendshoring and onshoring. In addition, under-investment in energy would drive another structural tailwind to inflation. All of which would result in conventional buy and hold investment strategy enduring tremendous cyclical volatility, but zero returns net of inflation over a 12-15 year time horizon. When I made that call, first in April 2020 to my private community (where I explained a lag was required) after the COVID stimulus packages were first passed, and then in late 2021 to this newsletter community after the lag had completed, I was all alone. None of the experts agreed.
So let's get an update. What does 20/20 hindsight reveal about epochal change 2.5 years later? Are we tracking as expected, or was I wrong? The economy changed from stable, low inflation growth to 3 years of a sticky inflation problem, clearly implying a new economic epoch. Structural inflation forced the Fed to raise interest rates at a historic pace creating one of the greatest bond bear markets in history with losses exceeding 50% at one point. This magnitude of loss unwound a decade of prior gains clearly signaling a new investment epoch. We've begun an aggressive energy transition phase with official government support for renewables and the reemergence of nuclear. Energy is the foundation of economic growth, and clearly the prior epoch of fossil fuels is giving way to something new. Two wars remain simultaneously active after decades of relative world peace. The old epoch was unipolar power, and a new epoch is emerging based on multipolar power. Politics is so deeply divided today that sober experts claim our democratic system is at greater risk of collapse than at any prior time. Congressional leaders are claiming it's the worst time to work in Washington in more than 50 years (new epoch). Multiple large banks failed last year due to record bond losses with more expected this year as commercial real estate losses add insult to injury. This is a developing problem likely to result in a new epoch, although it's still too early to call. While the direction is clear, more will be known in a year or two. The commercial office market is already in severe decline, with many experts claiming the problem is only in the first few innings of a nine inning game. This is expected to exacerbate the bank failure problem, and it's clearly a new investment epoch in commercial office real estate. Government debt radically expanded to grow at an astounding $1 trillion dollars every 100 days. This number is so obviously unsustainable that even mainstream media is now taking notice. In the old epoch, everyone knew government debt was a problem, but it was considered a problem for the future. The new epoch is realizing that future is now. (see the gold and bitcoin comments below...) As all of these changes compound, a chorus of experts are taking notice and joining my call - a day late and a dollar short. Most notable was the great Howard Marks and his "Sea Change" newsletter shared in these updates last year (see Jamie Dimon below for another high profile voice joining the chorus). No single fact in the above list qualifies as a change of investment epoch. It's when you combine all the changes that a clear picture forms.
If there's one part of the current picture that surprised me, it's how the stock market has recovered to make new highs. But let's look deeper behind these new highs for the latest symptoms that this truly is a new investment epoch: Stocks and bonds are now correlating. That's not what happened in the prior investment epoch, and it's bad news for conventional portfolio risk management through diversification. Not good for conventional buy and hold investment strategy. The current rally is running on narrow breadth lead by the Magnificent 7 tech stocks driven by an A.I. speculative frenzy. For many who've been in this business for decades, it feels like 1999 all over. Again, not good. We all know what followed... Most importantly, BOTH gold and bitcoin are leading the rally. That's an anti-government, anti-dollar bet that's becoming mainstream. You absolutely don't want to see that leadership when using conventional financial strategy. Again, not good. Let me be clear. We will experience more change this coming decade than we have in the entire past century. You need to position yourself to be on the right side of that change.
The economic issues described above are just a backdrop that determines valid investment strategy for the next decade. On top of that backdrop are converging exponential technologies in A.I., robotics, quantum computing, and biotech that will likely disrupt and reinvent every industry and business model. This is a big deal. Epochal change is exceedingly rare, but when it happens, it's epoch!
The key is to remember that it's not all bad. I'm an optimist. The seeds of the next wave of prosperity are always sewn in the devastation that precedes it. Every act of creation is at first an act of destruction. There is cause for optimism once we cross this bridge-period of difficulty.
I've explained in every issue for 2.5 years that there's only one investment strategy proven for managing your portfolio through epochal change so you can thrive. Those who took action on my recommendation when first made are smiling right now. Best of all, this recent rally has given you another chance to take action. It's still not too late.
We've got many more years to travel this journey. Position yourself accordingly.
Rest assured, I will continue providing educational resources to help you navigate (see below).
Enjoy! Just kidding with the headline, but only a little. The head of Morgan Stanley doesn't know me, of course. But I've been using the drug pusher analogy to describe Fed policy since mid-2020. Jamie is quoted in Australia's most-read business newspaper as if he pulled text from my private community and newsletter updates. The parallels prompted an international member of my Expectancy Wealth Planning community to share this article in the private forum saying, "Shows you how far ahead of the curve this community is! What was a fringe call in 2020 is now front page news in 2024." You heard it here first! Grant Williams is one of my favorite podcast guests for discussing all things epochal change. I always gather new insights. He spent years producing "The End Game" podcast series by asking the top financial minds how this debt-driven, liquidity party would ultimately resolve itself to become real investing and real economy again. He has distilled that wisdom into clear-headed, sober analysis that he shares in current interviews. Well worth a listen. Michael Howell did an excellent job of explaining (in an earlier edition of this newsletter) how government liquidity would put a strong tailwind to asset prices during this 2024 election cycle. So far, so good. However, John Hussman also does an excellent job in this issue by showing the downside risk being created in this process. My best guess is they'll both get to be right, which is why you need my recommended solution to manage your investment risk and pursue positive expected returns through the crazy market changes coming our way.
Onward and upward!
Todd Tresidder
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