The Sleep Well Portfolio at a Glance
Here comes 2023
SPY (Large Caps)
Equities have been out for a week in AWAKE and the SWP has now joined it. We are now prepared for the collapse stage of 2023. The first two quarters of 2022 are going to be rougher than the last 2 quarters due to contracting QOQ GDP and a tightening Fed. For now, we look at the mid-year mark of 2023 for the relative bottom.
One Month Risk Calculation – Risk Increasing
TLT (Bonds)
Bonds will still struggle in the new year but have now stabilized. Longer duration bonds have finally signaled to us that the collapse stage has been reached. While we do like bonds in the collapse stages of deflationary recessions, bonds are not as attractive during inflationary recessions. We will likely still use TLT to hedge but the risk is greater in TLT vs GLD.
One Month Risk Calculation – Risk Decreasing
GLD (Consumer Goods Inflation/currency Debasement)
As we have stated for the past 2 months, GLD is going to be our favorite asset at the end of this recession. That time is now and GLD makes up a huge part of our portfolio and helped us reduce risk on the major drop in equities last week. Gold historically likes two things. Debasing US dollars and falling interest rates. SHHHH, don’t tell anyone that these are the same thing. In the collapse stage, the Federal Reserve is likely to stall or reduce its monetary tightening pace to allow the recession to create disinflation. As they do this there will be a small reprieve from the runaway inflation, but it will inevitably come back or not drop at the levels required. When this happens, the Fed will retighten. For now, we will enjoy the debasement of the world reserve currency and stay invested in gold. Note: volatility is still high in assets and gold can drop week to week if bond yields spike. It's not a sure thing but it is the best long asset on the board right now.
One Month Risk Calculation – Risk Decreasing
UUP (US Dollar Relative Deflation)
Oh the days of strong dollars are over… Are they? Well overall the dollar is done with its breakneck rise but we will likely have another rally in the collapse stage. The difference between this rally and the last is that it will be a flight to cash not a selling of bonds that creates the strength of the Dollar. Nevertheless, we will pair gold and UUP together to make a beautiful harmony of hedging. We are likely to finally be able to perform well during now that we have multiple assets in play again.
One Month Risk Calculation – Risk Increasing
IWM (Small Caps)
We had mixed signals with the gaining GDP of 2022 Q4 QOQ and the dropping YOY GDP at the same time. The models pushed us into equities and those same models are now pushing us out at we slide into the contracting GDP YOY, QOQ and MOM of January 2023. Oh, and to top it off we have a Fed still selling assets into everyone’s faces. The news would have had everyone believe that the Fed pivoted, and stocks are a great buy. Well, thank the heavens for our macro-based approach that is keeping us out of this upcoming crash.
One Month Risk Calculation – Risk Increasing
EEM (Emerging Markets/ Relative Inflation)
Just as I said in gold earlier this year, later this will be our greatest asset soon. At the end of this recession, emerging markets will be on better footing than the US to stimulate their economies and will not have inflation that is above target. Yes, I am talking about China not “emerging markets”. But still, as the Dollar gets crushed in the back half of 2023 EEM will be gold! I dream of a day when the portfolio is long gold, long EEM, and Long IWM as the fed allows inflation to run too hot. That day is coming, and we could see in in a few months if the fed doesn’t get out ahead of the curve and really nip this inflation once and for all.
One Month Risk Calculation – Risk Decreasing
Drivers for Current Portfolio Allocation
The Fed has exhausted the positive GDP that has been backstopping its QT program. As we enter the new the Fed must stop its tightening program, or it will send markets crashing down. On the other hand, we have inflation running too hot for the long-term target. So if the Fed does choose to err on the side of the economy we will debase the USD and risk losing the reserve currency.
The 2nd is the likely option the Fed will choose, and Gold will be the favored asset. Emerging markets will prevail at the end with global GDP picks up and central banks around the globe ease. This will not help the underlying conditions for middle-class citizens of the world. We will get a deepening divide of the asset owners and the consumers of the world.
In time inflation will remain elevated and central banks will raise rates again. This of course will be after we get a very fast decline in CPI in the beginning of 2023. The news headlines will rejoice that the inflation cycle is over and we are all good now. Every rally will be “the bottom”. We know better though… contracting GDP + tightening fed + falling CPI = Down Equities.
May you ADAPT to markets and Sleep Well,
SWP Team
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May you ADAPT and profit,
Wayne Klump
Managing Partner