Hi Do, Here are Todd’s latest fun picks to take your financial skills to the next level... I have three great educational resources for you this week...
Epochal change has been the theme of this newsletter for more than year.
And for good reason. Taking action on this insight will determine your financial results for the next decade.
That's a big deal!
And today I'm going to switch things up by simplifying the analysis to one question - is liquidity expanding or contracting?
Periods of liquidity expansion correlate with declining interest rates, increasing market valuations, rising stock prices, and general asset inflation. It's known as "risk on" on the industry.
Periods of liquidity contraction are the mirror image, exactly as you experienced this past year - rising interest rates, declining stock prices, and general asset deflation - otherwise known as "risk off".
The prior epoch was built on ever-expanding liquidity. The cyclical rises and declines of the stock market rode these ever-increasing waves of liquidity.
All the other details I taught you this year about epochal change act as inputs that feed these waves of liquidity. Each influence contributes (or subtracts) from the bigger wave.
You can make it complicated by analyzing each individual influence, or you can understand the wave.
As long as we have excessively high consumer price inflation, the Fed's hands are tied to a policy of liquidity contraction (intentional asset deflation). That's the contraction wave, and we've been riding it for a year.
Where it gets complicated is what happens from here. Once the Fed has tightened (which is what happened during the past year) then what are the add-on effects and collateral damage that follow with a lag? What might break in the system to exacerbate the contraction wave?
The consequent recession, decline in corporate earnings, loss of bond market liquidity, pension fund crises, extreme currency fluctuations, and more, are examples of potential collateral damage when the Fed forces a liquidity contraction. These are the factors that determine how deep and wide this declining wave will travel. Will it be a soft landing, or a hard landing?
The key point to take away is how the first analysis is relatively simple - knowing the change from expansion to contraction (the past 12 months of this newsletter) is relatively straightforward - which is why I could make that bold call a year ago with total accuracy.
But the collateral damage is far less certain (the next 6-12 months).
In fact, uncertainty is the only thing that's certain.
You'll notice this "uncertainty" theme progressively developing in future resources that I share over the next 6-12 months as other analysts recognize the same issue. The risks are increasing, and the range of possible outcomes is widening. It's getting more difficult to know what's next.
That's why tactical asset allocation using trend-following is one of the best investment strategies in these macro-driven market conditions: Nobody knows when the bear market caused by these structural changes will run its course and resolve to a new bull market. Nobody knows how deep the bear market will ultimately run. Nobody knows what will be the strongest asset classes to invest in for the next bull market. Nobody knows when collateral damage will break things and how much impact it will cause.
One of the many advantages of tactical asset allocation using trend-following algorithms is you don't have to know. The algorithms decide all of that for you with mathematical discipline. No emotions. No second-guessing. Just follow the yellow brick road. You can learn more here...
It's the only way I know to convert all of this uncertainty into a reliable and profitable outcome. I can't imagine investing any other way.
Below are this week's educational resources to help you make smarter decisions:
Inflation is what's forcing the Fed to contract liquidity. This article provides solid research into the historical characteristics of past episodes of inflation across many economies. It's filled with valuable insights you won't find anywhere else. Forewarned is forearmed. The historically proven strategy for investing during inflation is trend following, and this link introduces you to my recommended done-for-you, turn-key solution that's perfect for a portion of your portfolio. (Note: the link above auto-resolves to the home page despite directly linking to the white paper. Fortunately, the November 16 white paper is easily found on the home page.) You first learned here more than a year ago that tactical asset allocation using trend-following would be one of the best investment strategies for the next 10-15 years. Well, this white paper provides the data from the past year proving that call was already accurate (and we still have more than a decade to go!!). Better yet, it also explains why it's likely to remain true for the foreseeable future. Read this research paper, and then check out my recommended solution for diversifying at least a portion of your portfolio into tactical asset allocation using trend following. Now that the easy money days are over with liquidity contracting, reality is slowly setting in. I dubbed it "epochal change" over a year ago. Grant and Pippa use different words to describe the exact same economic phenomenon. They reflect back on the illusion of cheap money, insane valuations, crazy speculation, and false narratives from the old regime. Then they draw the conclusion that investors must take a hard look in the mirror to understand how to protect and grow their portfolios in the future. There's a lot of wisdom in this episode.
Onward and upward!
Todd Tresidder
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