The Sleep Well Portfolio at a Glance
The Next Stage of the Recession

SPY (Large Caps)

  • Stocks up, bonds up, gold up, what is going on? It’s the transition into the collapse stage of the recession. We have briefly been pulled out of SPY but remain on very close triggers to an allocation baring a volatility spike in equities. We are now approaching the last stage of the recession when stocks typically accelerate to the downside. The S & P provides a strong diversification due to large allocations of consumer staples it's not as good as the Dow. Still, we will use it when we can but there is a significant downside risk when we do.


  • One Month Risk Calculation – Risk Increasing


TLT (Bonds)

  • It’s a bird, it’s a plane, no it's inflation. Inflation is still in the 90th percentile historically and bonds have now had the largest drawdown in history. This combination has historically created a large reversion to the mean. The most important thing to notice is that the long end of the curve is dropping aggressively while the short end of the curve is rising or stalling. This is the tell-tale sign of the collapse stage. This is when investors will push into bonds and further duration while liquidating riskier assets. This is because a 4% yield or a 5.5% corporate AAA bond started to become more attractive vs growth-sensitive assets like equities. Inevitably this will shift as growth reaccelerates.


  • One Month Risk Calculation – Risk decreasing



GLD (Consumer Goods Inflation)

  • Gold is back. This is likely the beginning of a new bull market in gold. Even as yields continue to stall/climb gold is favored when inflation is running beyond the historical mean. Bull markets typically don’t happen in one move though. Cross-asset volatility is still significantly elevated and the portfolio is positioned for the best possible asset for the collapse stage.

  • One Month Risk Calculation – Risk Decreasing



UUP (US Dollar Relative Deflation)

  • That pesky dollar. All year we never had another asset to balance it out with. Truth be told in a long-only portfolio designed to use multiple assets against each other this was not the perfect situation. Being dependent on a single asset is sub-optimal. Still, we have significantly reduced the risk to the portfolio vs RPAR, 60/40, and the S&P 500 just as we were designed to do. The dollar pulled the portfolio down into the max depths of its historical maxes and we are now pulling out of it. The dollar is likely to only play a small role in the portfolio from now on as bonds and gold will start to offset equity risk for us. Still, UUP will be our crash asset. When there is a quick liquidation of risk UUP spiked in bear markets, this will be our trigger to follow suit.

  • One Month Risk Calculation – Risk Increasing



IWM (Small Caps)

  • Small caps are still on the radar as they have been severely beaten down in this recession. With that said, we still have the collapse stage to deal with. Small caps will likely stabilize when the larger blue chips get rotated out in favor of higher growth potential small companies at the end of the collapse stage.

  • One Month Risk Calculation – Risk unchanged


EEM (Emerging Markets/ Relative Inflation)

  • With the dollar tanking, EEM is looking to be a nice play. Emerging markets are not a currency though. Yes, they have strong correlations to the dollar but they still must abide by the law of global demand. As the global economy shrinks over the coming quarters so too with the demand. This is good for inflation but bad for countries that thrive on producing raw resources for consumers. We wait on this one but as I stated late last year, EEM will be one of our greatest assets in the coming bull market (late/mid-2023)

  • One Month Risk Calculation – Risk Decreasing


Drivers for Current Portfolio Allocation

We never know how long the collapse stage will last. It really depends on the Fed. Typically a deleveraging has a dash of austerity, a dash of debt restructuring, and a dash of monetization of debt/government spending. We are beging to see some austerity in the crypto space during this recession. This is the first of many deflationary variables we will see during the collapse stage.

Right now we have a significant slowing YOY in GDP projected for the next 3 Quarters. Which would you rather have? A business with contracting revenues, shrinking margins, and reduced forward guidance, or a guaranteed 4%-5% yield.


May you ADAPT to markets and Sleep Well,

SWP Team



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