The Sleep Well Portfolio at a Glance
Inflation Longer


SPY (Large Caps)
 

  • US stocks have shown resilience over the last weeks vs emerging markets and Europe. What originally drove the rally from the lows in October was the slowing of rate hikes from the Fed while other central banks continued to hike. This devalued the Dollar at a very fast rate. This devaluation leads to risk on behavior in hard assets like precious metals, and real estate. This devaluation in the reserve currency historically leads to a rapid rise in stocks when the economy isn’t in an outright collapse. This happened in 2001, 2008, and 1974, all of which continued to roll over during the recession for another year. The S&P is currently cooling off from its relative highs and will likely face the inevitable headwinds that are the collapse stage.

 

  • One Month Risk Calculation – Risk Unchanged


TLT (Bonds)

  • The Fed has only delayed the inevitable by easing up early. Due to this, our models have adjusted and now project inflation to run hotter for longer. This is the exact effect that we discussed on our YouTube live stream, held every Wednesday at 3:30 PM Pacific. When inflation runs hotter for longer the Fed must continue to raise rates. This is bad for longer-term bonds until inflation truly dis-inflates. This disinflation has been driving our bond exposure but as we have seen in AWAKE, it was cut abruptly when the models shifted.

 

  • One Month Risk Calculation – Risk Increasing



GLD (Consumer Goods Inflation)

  • Gold is THE asset to have during a currency debasement, and did they ever debase the currency when they slowed down the rate hike cycle. The Dollar gained ground incredibly too fast and this was causing issues on the global stage. Emerging markets were hemorrhaging and the dollar was being replaced or avoided for trade. This is unacceptable for the reserve currency. We got a small taste of what the capitulation stage will look like at the end of this recession. When this recession is close to the end and the Fed drops interest rates or the government spends more to stimulate, we will see hard assets explode.

 

  • One Month Risk Calculation – Risk Increasing



UUP (US Dollar Relative Deflation)

  • Thankfully the Fed decided to ease up on interest rate hikes. While this is good for the global economy, we risk inflation hanging around for too long now. To finally stop this inflation train, the Fed must ramp back up its efforts when other central banks catch up, or risk a very long inflation run like the 1970s. During every stage of relaxation in the 1970s the dollar would get crushed on the global stage, only to reemerge stronger than ever. This is the natural ebb and flow of the reserve currency during a hiking cycle caused by inflation. The dollar is back online in a big way for AWAKE and SWP will soon follow.

 

  • One Month Risk Calculation – Risk Decreasing



IWM (Small Caps)

  • Small caps have faired well with the devaluation of the dollar over recent times. This is likely over due to inflation readings not slowing fast enough and even some still rising month over month. The job is far from done in the Fed’s eyes and that means more pain to come. One thing is for sure, this recession is going to draw out for much longer due to the recent action by the Fed. This is good news in a sense because the depth of the recession will be less, but bad because growth globally will now be very slow for a longer period of time.

 

  • One Month Risk Calculation – Risk Increasing


EEM (Emerging Markets/ Relative Inflation)

  • EEM is our favorite asset during the capitulation stage and the first stage of bull markets. While we saw a taste of this recently we are still far from that time. There is more pain to come when the dollar restrengthens. The warning sign will be the inflation readings stalling out or even reversing. This will be the death sentence for EEM, mainly because the Fed will have to retighten and drive the dollar back up.

 

  • One Month Risk Calculation – Risk Increasing

 
Drivers for Current Portfolio Allocation

We are spread out because we are in transition. AWAKE is significantly ahead of the next macro shift and will likely be faster to cut risk as it has over the last few weeks. Still, this is another large transition. The dollar will likely restrengthen and drive bond yields higher and stocks lower. Such is the inevitable reaction when the Fed prematurely slowed down its interest rate hikes. We now run a very high risk of runaway inflation or a lost decade ahead of us. While that is ok for investing with a macro portfolio it is unfortunate for global growth. Essentially we used up future growth after the covid drop and now must pay the price with sub-average growth.

UUP is the main driver again for AWAKE, and SWP will adjust soon. AWAKE has cut almost all risk to GOLD and Bonds but SWP is lagging in that area as well. Next week will likely be the data point we need for SWP to cut those assets aggressively. This is in preparation for the coming Dollar rally as the Fed and the markets begin to forecast more rate hikes and slower growth.


May you ADAPT and profit,

Wayne Klump

Managing Partner 


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