- Marking Money from the Turbulence of Secular Change is 180 degrees opposed to Investing for a Long Term Average of 10%.
- So why take the risk of a 35% to 85% drawdown?
- There are ways to move ahead of active management of “smart insurance” (aka option strategies) to protect a long-term wealth-building portfolio.
To be better than the next guy in the world of risk assets, you must know where you are in the course of history. You must know where you stand in the big picture of things.
Over the last 45 years, my career has covered all the bases, so I have a 360-degree point of view. When I got into this business in 1974, what was made clear to me is several vital factors contributing to the secular bull market to come.
At that time, the industry was not viewed very positively by the public. Our industry ranked below a used car salesman and a politician like Tricky Dick Nixon. Yet the research I did and the visionaries I read provided reasons why investors should be profoundly and exceptionally bullish.
Over the past four decades, I have seen those factors unfold before my eyes taking the Dow from 570 to 30,000. Through John Mark Templeton and other visionaries, I realized that I sat on the verge of a gigantic boom.
I heard that the demographics favor the asset boom; that the dollar’s unpegged devaluation trend would underscore an unparalleled cycle of price gains in the markets. Clients laughed when we talked about 10,000 on the Dow; hell, they thought Dow 2,000 was a joke.
Reality at that time had fed funds at 19%, the highest level in 200 years. At that time, nobody thought inflation would ever end that it was a permanent fixture of portfolio planning.
However, in 79’, the technical department at Merrill Lynch- thought inflation was uncertain. Gold, the gold miners, and the other inflation hedge stocks we're making a major peak, and the election of Reagan and his pledge to break the inflationary spiral – would be the catalyst of uncertainty to unsettle these markets. Signs that a significant – secular- change was occurring.
So along with the demographics of the baby boomers hitting the job market, the dollar's devaluation, the plaza accord in 85, the secular peak in interest rates, the capital investment flows from boomers in their prime earning years provided the demand for a rising asset market. The big trends that began in the late 70s and early 80s included falling interest rates, neo-liberal fiscal policy, aka voodoo economics, lower (WAGE) inflation, globalization, and liquidity via debt expansion.
Well, from the time I left the University of Missouri with a BA in Philosophy/Psychology, going to Wall Street over the next four decades, I’ve been blessed with a booming asset market.
Not just share prices worldwide, but bond prices and real estate prices boomed and other risk assets.
Jump ahead into the end of the year 2020. The results are historically high asset valuations; the highest corporate debt to GDP ratio in America's history; 17 trillion dollars in negative-yielding debt globally; the lowest capital gains tax in US history.
Plus, in the last 20 years – since 2000 - the secular trend resulted in the highest historically income/wealth disparity in the USA, bringing with it related social tensions uncovering deep-seated bitterness in a group nick-named “fly-overs” and “deplorables.”
So what can the USA do for an encore?
The first wave of baby boomers began retiring in 2016-2017 and, over the next number of decades, will need to withdraw on their 30 trillion dollars of retirement assets to live on. We are now witnessing the end of a 45-year demographic growth boom along with a debt supercycle coming to an end bordered by zero as well as neo-liberal economics that has run its course pushing over a trillion-dollar national debt. The path of history is changing. The self-aggrandizing, fug your buddy, grab for money, and the seizure of power for power’s sake symbolized at the extreme by Donald Trump is exiting with the indignity it deserves. All of which sets up the baby boomers in 180 degrees oppositions to younger generations, the millennials.
This is just not a bedtime story for your babies, your grandbabies, or your great grandbabies; it is a massage to get prepared; it is not a siren song. It is the reasoning behind a significant regime change because to produce an encore, they - the powers that be- cannot use the same methods that created the problem. Moreover, going back to normal as in real economic growth - not just asset-based inflation- involves only three paths: tail risk left, tail risk right, or both over the next decade or two.
Contrary Thinker called for the big change in late 2017, and the market confirmed with the mini-crash in February 2018. Contrary Thinker also timed the peak in late September 2018 and the peak in late February 2020. Measures of volatility continue to show an increased risk - both historical and perceived - especially when we look at the P&L of a long-only volatility futures trading system, delivering better results than buying and holding the S&P futures last three years.
From the end of 2017 – the year of the lowest market volatility in history - the crashes have become larger and larger. Already three in three years, which is not the only suggestion of a new trend to continue for the new decade.
There are ways to move ahead of active management of “smart insurance” (aka option strategies) to protect a long-term wealth-building portfolio. What is critical for you to know, this logic moves advisors, traders, and managers into the same realm of trading of the great ones who have made their bloody fortunes on the wings of tail risk.
More to follow regarding engagement rules and strategies for the new regime. Have a great two weeks of holiday. Stay tuned.
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