Vailshire Capital Management - April 2022 Update

Summary

• US GDP growth saw a top in the 4th quarter of 2021 and has been steadily declining since that time.
• Tightening monetary policy (aka “quantitative tightening”) into an economic slowdown generally produces anxiety within the markets sooner or later.
• Some of our entry positions are 5-40% below the recent highs of these assets.

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APRIL 2022 UPDATE FOR VAILSHIRE’S SEPARATELY MANAGED ACCOUNT CLIENTS

April has arrived and spring is in the air here in Colorado!

I hope each of you is doing well.

Current Market Conditions

My research continues to suggest that there is trouble under the economic hood, both here in the United States and internationally. US GDP growth saw a top in the 4th quarter of 2021 and has been steadily declining since that time.

Inflation, for its part, remains very high and has yet to officially peak. My refreshed expectation is that inflation will not go much higher than the February CPI print of 7.9%, and it should remain high, yet at a slower pace (disinflation) throughout the remainder of 2022.

Year-over-year earnings growth for US companies should decrease substantially in 2Q 2022 as well. These numbers won’t officially be reported for several months, but we can glean supporting evidence from 1Q 2022 earnings conference calls in the near-term.

Not to be left out of the disappointing metrics, the Federal Reserve is tightening monetary policy approximately 6-9 months too late. Their backwards-looking economic data are strong, as is widely known, but what lies ahead is concerning. Tightening monetary policy (aka “quantitative tightening”) into an economic slowdown generally produces anxiety within the markets sooner or later.

Finally, parts of the yield curve have just officially inverted. This is a very reliable harbinger of a coming economic recession. While not necessarily imminent, such an inversion suggests that a recession is nearly inevitable in the US within the coming 24 months. Vailshire accounts will definitely prepare for the possibilities, whether bullish or (unfortunately) bearish for the majority of market participants.

Stocks, bitcoin, and related #RiskOn assets have staged a small comeback in recent weeks following an abysmal performance since 4Q 2021. It’s possible that they have officially bottomed in March 2022, but I remain skeptical that we have already seen the worst of it.

Time will tell.

Strategies for Vailshire’s Separately Managed Accounts

Despite the weak 1Q 2022 performance, I was very happy to add full positions to all of our “hold forever,” capital efficient and/or inflation-resistant assets over the past month. Some of our entry positions are 5-40% below the recent highs of these assets. I expect these holdings to be the bedrock of our Vailshire portfolios in the coming years and, hopefully, decades–with solid returns even if we get several years of stagflation, which I expect.

The other one-third to one-half of our portfolios consists of “momentum trades.” These assets are generally of the growth and innovation sector–including bitcoin infrastructure, crypto exchanges, and smaller technology stocks–and tend to be much more volatile than our above-mentioned “hold forever” assets. Going forward, because of this volatility we will only own these assets while they are in a confirmed uptrend. If and when the upwards momentum has been broken, we will sell the asset to preserve our gains.

It should be noted that a few of our “momentum trade” assets include inverse exchange-traded products that serve to hedge (or short) the market in times of bearish macroeconomic conditions (such as now). In general, when the stock market decreases, these assets actually increase in value, and vice versa.

While this momentum trading strategy does carry significant tax implications in Vailshire’s non-tax-sheltered accounts, I would rather pay capital gains taxes on profits than pay no taxes on -40 to -80% losses. Hopefully this makes sense and is agreeable to you as well.

Depending on your financial objectives and individual account investment privileges, Vailshire’s separately managed accounts are currently allocated in the following manner:

• 60% select “hold forever” capital efficient and/or inflation resistant equities
• 4% “momentum trade” assets
• 24-36% cash
• 2% bitcoin, Bitcoin infrastructure, and related digital assets
• 0-4% short S&P 500 ETF
• 0-4% short/double short NASDAQ ETF
• 0-4% short US small cap stocks ETF
• 4% short innovation stocks ETF

If you are a Vailshire Client, feel free to log into your Vailshire-managed account((s)) at Interactive Brokers and see how your own portfolios are positioned. (It’s a good idea to log into your accounts at least quarterly, just to make sure your settings and demographics are up to date.)