To The Moon

• Allocation: Capital protection; Commodities + Gold + Cash
• Markets: The bear continues with no end in sight

2022 has been more than challenging for investors. The year's first half had the largest wealth loss in human history. I am not sure if we fully understand the long-term consequences of this. In times like these, you have to survive long enough to be prepared when growth returns. We need to protect cash from buying the generational lows when they come. Remember, capital preservation is everything in bear markets. Our Global Momentum portfolio remains in Commodities + Gold + Cash.

More and more analysts see the global economy moving towards a recession. For example, Sequoia sees signs of a prolonged recession. It’s said, “We do not believe that this is going to be another steep correction followed by an equally swift V-shaped recovery as we saw at the outset of the pandemic.” You can find Sequoia’s full analysishere.

You have to survive long enough to get lucky.

U.S. stocks and U.S. treasuries had their worst first six months in more than half a century. The Bloomberg US Treasury Index had never seen a worse start to the year since its inception in 1973. The S&P 500$S&P 500(.SPX)$ experienced its worst first half-year since 1970. Traditional stocks/bonds portfolios are in trouble and it shows how important a properly diversified portfolio is. Diversification is not buying different stocks or bonds. True diversification includes commodities, real estate, and other alternative assets and styles. Concentrating on stocks and bonds is a highly risky bet.

 Is negative Sentiment Enough?

The sentiment is negative (by various measures and indicators) and many participants are still waiting for a final capitulation. They argue that the decline with severe losses for investors has been quite moderate. This argument finds support when looking at the equity allocation of U.S. households. Despite the large losses in the market, equity allocation only dropped from 38% to 36%. Capitulation looks different.

 The Liquidity Cycle

There is a lot of noise about the economy, inflation, interest rates, and the end of growth. However, the most important driver is the money supply. Despite all the talks about rising interest rates, quantitative tightening has not started. Central banks around the world have only started to increase interest rates (mostly from negative levels).

What is different this time? Inflation has been running away in most countries around the world. Probably the most extreme example in Europe where inflation is around 8% but interest rates are still slightly negative. Rates have still a long way to go up.

To learn more about the Liquidity Cycle, we highly recommend digging deeper into the Austrian School of Economics and its explanation of the business cycle. In our view, this is the only school of thought, which provides a proper explanation for booms and busts, superior to all other theories out there. The Austrian School of Economics views business cycles as the consequence of excessive growth in bank credit due to artificially low interest rates set by a central bank or fractional-reserve banks. A good introduction can be foundhere.

How to protect your portfolio?

It is not the time to be a hero in the markets. So what’s the right approach to guide a portfolio through times like these? In our previous posts (hereandhere), we already highlighted a few ideas. For investors, is worth thinking about:

1. Realize that the regime has changed, we are in a bear market. Bull market strategies (buy the dip) don’t work.
2. True diversification; stocks and bonds are not enough, adding alternative asset classes and alternative strategies helps; we follow a Momentum approach (alternative strategy) and our universe includes commodities, real estate, and FX (true diversification).
3. Reduce exposure, cash might be a good (short-term) position; our Global Momentum portfolio has been 50% in cash for the last two months. If there are no opportunities, protect your capital.
4. Protect your portfolio; if you want to hold on to certain positions, start hedging. Hedging is like insurance, which often comes with a premium. Many investors set up hedging positions during bear market rallies. Don’t confuse hedging with selling short (speculating on falling prices). Hedging often comes with a cost (cost not profit center) but it should lower your drawdowns and volatility (i.e. risk).$NASDAQ(.IXIC)$ $DJIA(.DJI)$

https://medium.datadriveninvestor.com/not-the-time-to-be-a-hero-dcb1d2862d4c