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Traditional Portfolios Are Scary—Here’s What Lies Beneath

traditional portfolios

Below, we look again at the dangers of traditional portfolio approaches to a non-traditional market.

There’s nothing traditional about the current stock and bond markets or the levitation trick being pulled off by the magicians at the Fed.

When markets hit new highs in the backdrop of a global recession, one should not be bullish, but rather extremely perplexed.

And deeply concerned.

In short: something is clearly bizarre, but not without a simple explanation.

Fundamentals vs Fantasy

In Q2 of this year, our national income statement as to productivity—aka “GDP” — dropped by over 30% and unemployment in the US has since raced to the moon, with New York at 15.9% and Massachusetts (dear to my heart in myriad memories and ways) being the worst hit at 16.1% unemployment.

Nor is the U.S. alone in the disconnect between stalling economies and central bank supported exchanges.

traditional portfolios

By all accounts, the U.S. is up to its ears in recession territory, and by most accounts, steadily steering toward a Depression, though by pure math, we were already in an economic depression even before the COVID headlines rocked our 2020.

Meanwhile, markets have reached new highs, surpassing the February 19th peak despite an unforgettable March nosedive, which but for the unprecedented “stimulus” of the Fed and a whole lot of deficit spending from DC, would have otherwise sent a natural stock market to bottoms well surpassing the dark autumn of 1929.

But as informed investors now accept without having to don a tinfoil hat, there’s nothing at all natural or inexplicable about these markets.

Instead, we live in a post-capitalist age of centralized Fed markets.

The days of Adam Smith and natural, free-market price discovery are well behind us. This is now obvious, as is the rigged nature of our Fed-supported stock exchanges.

Twilight Zone to Danger Zone

If my definition of “Twilight Zone” markets seemed appropriate pre-COVID, today it’s beyond debate that we have entered a market dimension beyond reason.

In fact, I’ve further argued that we’ve gone from a Twilight Zone to a Danger Zone as the NASDAQ has already seen over 35 record-high, melt-up closings in 2020, despite the real economy around us falling to its knees.

There are many who are saying that the NASDAQ (and hence the tech sector it embodies) will save us, and that such tech excellence explains the surreal disconnect between the markets and the economy.

Well folks, that’s simple nonsense, for all the reasons I outlined here.

Technology is not what’s sending markets from the Twilight Zone to the Danger Zone.

Revealing the Magic Trick

The fact is that markets are rising due to two primary yet media ignored and Fed-created steroids: 1) unlimited money printing and 2) the greatest artificial low rate debt binge that US markets have ever seen.

As Lance Armstrong reminds, steroids can work—for years and years and years…until they don’t and the entire victory lap which the markets have been enjoying for years ends in an inevitable disgrace.

How It All Ends

As unlimited money printing slowly kills the dollar in your wallet and record-low (as well as artificially repressed rates) go from compressed to springing, the party the markets are enjoying today will end in a hangover of historical proportion.

If you want to know how it all ends, I’ve addressed the two biggest rocks lurking beneath the current market wave here and here.

For now, however, and despite vacillating up-weeks and down-weeks, the surreal market melt-up continues as investors crowd together like nervous sheep chasing new highs with an almost mindless faith in the power of the Fed to outlaw market crashes with a little help from a money printer and new batch of IOU’s from junk-bond issuers to the US Treasury.

When It All Ends

But just because we’ve outlined how it all ends, that doesn’t satisfy the question on most investors’ minds, namely: when it all ends.

So, let me address and answer that seminal question squarely in five words: I HAVE NO IDEA.

In fact, no one does.

Market timing is for tarot card readers, not macro thinkers.

Calibrating Faith?

If faith in the Fed (and hence unlimited currencies and debt) are what sustains the current “everything bubble,” how can I (or anyone else) predict the precise time for something as nebulous and capricious as a loss of faith in a central bank that deliberately uses dishonesty to otherwise keep that needed faith alive?

After all, there is no “faith” algorithm or market data “faith-point” we can track for such precision. Like Hemingway’s description of poverty, a loss of faith “begins slowly at first and then all at once.”

For now, investors are just slowly catching on to the Fed’s declining bag of tricks. The faith in Fed magic is just slowly starting to erode.

But just because we can’t predict the precise date of a dying faith scale and hence a dying market, this doesn’t mean we can’t be one step ahead, as well as two steps prepared, especially given the massive market dislocations and warnings that we can track today.

Storm Tracking

The complex market signals which Tom and I monitor, and which our subscribers see reduced to simple signals on their screens 24/7, still allow us (and them/you) plenty of time to see the risk signals and hence avoid the next big portfolio “uh-oh” moment, even if its precise arrival date is not indicated today.

That’s how and why we objectively avoided the market hurricane in March—without having to predict the precise date of its landfall.

But what we saw (and avoided) in March was a mere tremor compared to the market earthquake to come, whatever day or year that may be.

The current national debt levels confirm that the pain levels in the next record-breaking market crash will be equal to or greater than the record-breaking debt levels which preceded it. Austrian rather Keynesian economics supports this forecast.

The Secrets to Market Wealth

Tracking this inevitable moment of “uh-oh” and market risk is critically important, for as we’ve said many times, the secret to making real wealth in the markets is: a) not losing it and b) buying at bottoms not tops.

Many times—i.e. here, here, here, here, as well as here and elsewhere, we’ve documented in detail how we build and prepare portfolios to embrace these simple yet all-too-often ignored elements to successful investing.

Toward this end, here’s another secret we’ve disclosed in the past—traditional stock/bond “diversified” pie chart portfolios will get you slaughtered.

No Time for Tradition…and 60/40 Portfolio Monkey Business

Such traditional approaches to a totally non-traditional series of market drivers and market risks are as outdated today as rotary-dial telephones.

This traditional thinking is exemplified by the 60% stock and 40% bond portfolios that traditional advisors “design” and adjust with all the nuance and skill level of an office of trained monkeys…

But thinking in groups while wearing ties (and yes, even a monkey can wear a tie) is a key to consensus job security and the sustained level of mediocrity which so defines the financial advisory business which Tom and I left without a second thought, because we saw how such monkey business works and works and works until, well it ends in disaster…

For now, of course the 60/40 pie chart industrial complex seems to be surviving and working, as stock and bond markets entirely supported by a central bank, have…well …done very well.

Until, again, they don’t…

Like the Arc of a Baseball…

The fun ends when the Fed’s “support” for these otherwise peaking, over-bought and risk-saturated stocks and bonds begins to lose its strength.

Like a pop-fly to center field, Fed steroids will reach their dramatic high point, and then slowly but surely head back toward the ground.

Bonds, for example, have enjoyed such crazy highs for years—but they are now beginning their slow descent toward center field, as they’ve been so over-bought due to Fed rate suppression polices that their prices have peaked and hence their yields (which move inversely to price) have hit the basement of history.

In short, bonds have peaked and are going to fall.

Meanwhile stocks, emboldened by the years of QE and artificially cheap debt which allowed companies to borrow on the fly to buy back their own shares, are also peaking, as the price to earnings (PE) ratio on the S&P has passed 30—a classic sign of over-valuation.

Bonds and Stocks No Longer Balancing Risk, But Doubling It

All of which brings us to this flashing neon sign of obvious concern, namely: Both bonds and stocks are peaking at the same time.

But as your traditional monkey-business financial advisor would have you otherwise believe, bonds are supposed to move inversely to stocks in order to protect your portfolio—i.e. zig while stocks zag.

In short, bonds were traditionally touted as a portfolio and volatility buffer and safe-haven.

Well folks…not anymore.

Bonds and stocks are rising together on Fed support (and investor faith); this means they can and will fall together when that faith is lost for the various reasons discussed above.

So, if you’re still drinking your advisor’s traditional 60/40 Kool-aide and thinking your safe in such a “diversified” portfolio…and if you’re still thinking that doing what just about everyone else is doing means your safe…

Well, please think again, because the most successful investors (and frankly successful anything, for that matter…) never do what everyone else is doing.

Instead, join the clever minority here at Signals Matter, where we’re happy and relieved to say that our portfolios are nothing at all like everyone else’s.

As Sting, the songwriter of my youth, famously wrote: “Men go crazy in congregations; they only get better one by one.”

More importantly, our portfolio beats the markets as to both return and risk.

Sound good to you? Confirm the same here, and better yet, join us here.

In the interim, Tom and I wish you a safe weekend as I fall out of more saddles on Saturday. The world and markets may be crazy, but your portfolio can still be sane.


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