The Sleep Well Portfolio at a Glance - 3/25/23
The Death of the Dollar
 
SPY (Large Caps)
 

  • Just as recently as 4 days ago, there was hope. Hope that the Fed was coming to the rescue and the tightening would come to end. The hope was that the end of tightening would mean that we are going to enter into a new bull market. Well per our models it just means that everything is going to get worse before it gets better. In the collapse stage of recession, the deleveraging is accelerated and the credit conditions get worse. This creates a self-feeding cycle of declining growth. That is until the stimulus stage. For now, we are squarely at the beginning of the collapse stage and have at least a quarter in front of us of slowing growth and credit tightening further.

 

  • One-Month Risk Calculation – Risk Increases

 
TLT (Bonds)
 

  • Bonds are getting very attractive. In the Collapse stage, Bonds is a favorite asset of ours. The catch right now is that month-over-month CPI is still accelerating. We would like to see a little more disinflation before a green signal. Still, we will likely dip a little into bonds but not as much as gold from here on out.

 

  • One Month Risk Calculation – Risk Decreasing

 
 
GLD (Consumer Goods Inflation)
 

  • Gold has had a large allocation in the AWAKE but was cut from SWP. This shows how different the two portfolios are in a fast-moving market. Still both will have gold in the coming weeks. Gold is the best asset we can hold in a collapsing stage with higher-than-average inflation historically. Much like UUP was our asset of choice for de-risking last year, gold will be our asset of choice for the remainder of 2023.

 

  • One Month Risk Calculation – Risk Decreasing

 
 
UUP (US Dollar Relative Deflation)
 

  • Now we enter a new era of the weak dollar. With inflation at historically high levels and the financial system showing stress the Fed is forced to not tighten any more. This will inevitably lead to higher cpi as the wage inflation spiral continues while the system cannot afford higher interest rates to combat it. We look at the 90s for inspiration and data on how assets perform in this environment. The dollar was a poor bet and emerging markets were the best-performing assets for more than a decade. Still with that said, in the collapse stage, we will still see some strength in the dollar in risk-off cycles. This is primarily due to a cash grab effect from institutions de-risking or being forced to sell assets.

 

  • One Month Risk Calculation – Risk Increasing

 
 
IWM (Small Caps)
 

  • The Small cap index is packed full of small regional banks. During a financial collapse, the IWM will be one of the worst performers. The portfolio has already de-risked for AWAKE and will fully de-risk in SWP in the coming week. Small caps are for growth and growth is now coming to a screeching halt.

 

  • One Month Risk Calculation – Risk Increasing

 
EEM (Emerging Markets/ Relative Inflation)
 

  • We are now in a new paradigm. The next decade will be unlike the last 20 years. We will have dollar weakness and persistent inflation as the financial system attempts to subdue record inflation with its fiat money system. This will undoubtedly create a situation in which emerging markets will prevail and investment capital will be welcomed into other markets other than the US. Emerging markets are now the best equity asset in the portfolio and will likely take center stage when risk on is signaled. Now, this doesn’t mean we are all go bullish, but it is for sure the beginning of some positive equity exposure once again.

 

  • One Month Risk Calculation – Risk Decreasing

 
Drivers for Current Portfolio Allocation
 
A clear shift into the Collapse stage of the recession. This is where Bonds, Gold, and Dollars are our prevailing exposures. This time is a little different to the previous collapse stages. Why, because inflation is at 6% and unemployment is still at rerecord lows. The Fed can't do its job without breaking the banking system. This places the odds of stronger for longer inflation much higher.

If the Fed can't raise interest rates or is forced to save banks and print more money, just as it did last week, then we have a very precarious situation. The dollar will fail to strengthen if other countries do not have the same financial issues. At the same time, the Dollar is the world reserve currency, and that inflation gets pushed to the rest of the world. This means that global inflation will remain elevated except for countries that are ahead of the curve like China.

EEM and GLD will be our bread and butter for the next quarter with a dash of bonds. This is when we can finally get some sizable returns, rather than the choppy situation we have had recently. As a long-only portfolio, we thrive on Assets generally going up and steady macro trends. We are likely to have more of that over the coming months.
 
May you ADAPT to markets and Sleep Well,
 
SWP Team
 
 
 
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May you ADAPT and profit,

Wayne Klump

Managing Partner