Two Things

I have some hobbies. One of them is hair cutting. When I have the time, I enjoy giving haircuts to my friends and family, especially because; after you do the work- you get to admire it!

Recently, I visited a friend. This friend is going through an experience with serious implications. So serious in fact, that I imagine essentially all of their normal thought patterns would be disrupted.

It was a reminder to me about the uncertainties of life. It also made me think of Chris Martenson’s work around the 8 different forms of Capital. Finally, it gave me a lot of joy to be of service, with a haircut, to a friend.

I have lived this experience before with clients. Mortality is one of the things all of us will eventually face.  Thinking of mortality is uncomfortable. Yet it must be done. I believe that exploring the dynamics of living, with the reverent company of an advisor or partner is superior to working it alone. I know that when I serve as an advisor, I will provide valuable feedback and coaching that comes from experience; I know that the household and it’s heirs will feel more confident in their path, through my service.

On another topic, I continue to believe that the SP500 is going to make a new lower low, before a new bull market begins. I won’t spill very much ink around this idea since I have done so before. Of course, I can be wrong and I will monitor the market to determine if this thesis needs to be abandoned (price breaks above and maintains a level higher than the current down sloping channel). That said, the essence of the thesis is that we are transitioning into a world where several of the key themes from the last 20 years are running in reverse (globalization, cheap debt fueling inexpensive energy extraction, relatively synchronized political momentum, low equity market volatility, a-historic corporate profit growth).

Let’s not forget debt is a promise to repay and we have just lived through an era where the amount of promises compounded exponentially. Now, the gap between the output of the economy and the debt is very wide. Historically, at these levels, the promises (debts) are never repaid in real terms. So we should assign a high probability to inflation. We should also expect volatility to be high.

Here’s a thought with a slightly more conspiratorial flavor to it; the world may already be engaged in a war, a fifth generation type of war. This type of conflict has infinitely many theatres: Social Media, economic, kinetic, space, political, cyber, propaganda, financial and many more. Perhaps what is not unique is that the goal of the war, like all wars, may be to degrade the ability of the adversary to engage in the conflict. This idea is certainly useful for understanding why our world is so confusing.

In terms of acting on this information, it’s easy and it’s hard at the same time. It’s easy because we know that a low correlation basket of assets tends to be successful delivering purchasing power into the future, including through extreme environments. It’s hard because, a low cost, 60% stock, 40% bond portfolio has generally outperformed the truly diversified strategy for the last 40 years. Our species has evolved with an affinity for linear thinking, and that would tend to lead the holder of the 60/40 portfolio to take no action, especially when some of the loudest voices they hear are those of their existing salespeople/brokers/advisors telling them that technology is going to create heaven on earth; that the price of energy is going to zero.

Two things: Over what time frame will heaven on earth arrive and how did the German 60/40 portfolio do over the period 1939 – 1945? None of us get to choose the era into which we are born. However, we are permitted the choice on how we allocate our capital.

I’m definitely keeping my fingers crossed for heaven on earth. However, it’s not my investment strategy. Besides if the price of energy really is going to zero, expressed in dollars, you don’t need to manage risk. You won’t even need capital, because dollars are a claim on the economy (GDP), the GDP is 99% correlated to how much energy we use and energy is free. Thereby everything is free.

Again, over which time frame do we arrive at this destination? Is it unreasonable to think that discomfort will precede pleasure, as it always has for great human civilizations, or is it different this time?

I really enjoy talking about these subjects and testing my thinking through debate. Please send me an email with a question or thought in it or ask me more about how I view managing risk in this environment.