Liquidity Is Dropping Fast & The Fed Risks Market Havoc: September 2023 Update
Dear readers,
Dr. Jeff Ross, Founder & CEO of Vailshire Capital Management LLC, releases a monthly portfolio and markets update for his clients. Thanks to him, we’re privileged to distribute his excellent work to you, our alpha-hungry TBL readers.
We proudly present Vailshire Capital Management’s September 2023 Update!
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Today’s Topics
Like oxygen, liquidity generally gets taken for granted... until it suddenly disappears
Indeed, the Fed's "higher for longer" mantra rages on and, as it does, the risk for wreaking market havoc rises ever faster
Though the future is unknowable, those who are wisely prepared will likely experience the best outcomes
Current Market Conditions
Liquidity is Like Oxygen for Risk Assets
Hello from Colorado!
I was recently honored to join my friends: Preston Pysh, Joe Carlasare, and Steven McClurg on Bitcoin Fundamentals by The Investor's Podcast Network to do another round in our Mastermind series, entitled: Bitcoin and Macro Mastermind 3Q w/ Joe Carlasare, Jeff Ross, & Steven McClurg (BTC144).
As usual, it was a fun and enlightening discussion... so check it out and let me know your thoughts!
Since my last monthly update for Vailshire's SMA clients, US net liquidity has been treading water, while worldwide liquidity continues to drift lower (see chart below). Bitcoin and most risk assets have responded accordingly by meandering sideways or lower. Meanwhile most technology and (especially) AI-related stocks still haven't gotten the notice to calm down.
Liquidity is like oxygen for markets. No one really thinks much about the level of oxygen until it suddenly becomes unavailable. Similarly, risk assets and bitcoin tend to appreciate methodically in price until the underlying liquidity is removed.
The less liquidity, the less the market's appetite for assets further out on the risk curve. As people sell their "risky" assets for US dollars, the demand for dollars outpaces available supply and the US dollar predictably strengthens (rises in price).
Helping things along...
The Federal Reserve continues to speak in hawkish terms while the global economy contracts. As expected, inflation is moving in choppy sideways ("crab-like") fashion now, instead of the disinflation we experienced over the past year or so. In light of this, we should expect Jerome Powell and the Fed to continue talking tough about holding the Federal Funds rate high and continuing quantitative tightening until a deflationary market event--including a disorderly bond market--forces them to quickly pivot and turn dovish.
Until that happens, I anticipate a continued sideways-to-lower crab market in most risk assets, bitcoin, and even inflation. Indeed, the Fed's "higher for longer" mantra rages on and, as it does, the risk for wreaking market havoc rises ever faster.
Invest accordingly.
The graph below depicts weekly US net liquidity (blue line) and major world bank approximate M2 money supply (gold line at bottom) since the beginning of May 2023, compared with the 10 largest Vailshire portfolio holdings of: AutoZone, Inc.(ticker: AZO), small-cap stocks with high free cash flow (FCF) yields ETF (CALF), large-cap stocks with high FCF yields ETF (COWZ), Franco-Nevada Corp. (FNV), MicroStrategy (MSTR), NVR Inc. (NVR), NASDAQ stocks (QQQ), Texas Pacific Land Corp. (TPL), Vanguard Total International Stock Index Fund (VXUS), and Valkyrie Bitcoin Miners ETF (WGMI). Note that US net liquidity has mildly contracted by -0.5%. The best performers include TPL (35.9%) and CALF (18.5%), while AZO (-6.1%) and FNV (-9.3%) have relatively underperformed.
Strategies for Vailshire's SMAs
During the month of August, we replaced Nike Inc. (NKE) with a well-run oil company (and Warren Buffett favorite), Occidental Petroleum Corp. (OXY). During this coming decade of expected stagflation, I think that top-tier oil and gas companies will outperform consumer discretionary businesses by a wide margin... hence the long-term switch.
We also took profits and trimmed several core positions that started to lose short-term momentum. These changes will be reflected in the portfolio allocations below.
Our Vailshire portfolios continue to be allocated towards a 60% equity and 40% sound money structure. I believe that this two-pronged approach will serve us well throughout this decade of anticipated economic stagnation, high and/or volatile inflation, and eventual credit and monetary expansion.
Here is a summary of our current 60/40 "stagflation-busting" Vailshire portfolio allocations:
Vailshire's Aggressive separately managed accounts (SMAs) are allocated as follows (current base % position size):
EQUITIES (60%)
2.5% ADBE
7.5% AZO
5% CALF
5% COWZ
2.5% MELI
2.5% MSCI
5% NVR (2/3 position)
1.67% OXY (2/3 position)
3.33% QQQ (2/3 position)
7.5% TPL
1.67% TSLA (2/3 position)
2.5% TT
2.5% V
3.33% VXUS (2/3 position)
7.5% cash (most earning up to 4.83% interest at Interactive Brokers)
SOUND MONEY (40%)
0% FNV (gold royalty; 0/3 position)
10% MSTR (bitcoin proxy; 2/3 position)
6.67% WGMI (bitcoin miners; 2/3 position)
23.33% cash (most earning up to 4.83% interest at Interactive Brokers)
Vailshire's Moderate separately managed accounts (SMAs) are allocated as follows (current base % position size):
EQUITIES (60%)
2.5% ADBE
7.5% AZO
5% CALF
5% COWZ
2.5% MELI
2.5% MSCI
5% NVR (2/3 position)
1.67% OXY (2/3 position)
3.33% QQQ (2/3 position)
7.5% TPL
1.67% TSLA (2/3 position)
2.5% TT
2.5% V
3.33% VXUS (2/3 position)
7.5% cash (most earning up to 4.83% interest at Interactive Brokers)
SOUND MONEY (40%)
0% FNV (gold royalty; 0/3 position)
6.67% MSTR (bitcoin proxy; 2/3 position)
3.33% WGMI (bitcoin miners; 2/3 position)
30% cash (most earning up to 4.83% interest at Interactive Brokers)
Vailshire's Conservative separately managed accounts (SMAs) are long-only and are allocated as follows (current base % position size):
EQUITIES (60%)
2.5% ADBE
7.5% AZO
5% CALF
5% COWZ
2.5% MELI
2.5% MSCI
5% NVR (2/3 position)
1.67% OXY (2/3 position)
3.33% QQQ (2/3 position)
7.5% TPL
1.67% TSLA (2/3 position)
2.5% TT
2.5% V
3.33% VXUS (2/3 position)
7.5% cash (most earning up to 4.83% interest at Interactive Brokers)
SOUND MONEY (40%)
0% FNV (gold royalty; 0/3 position)
3.33% MSTR (bitcoin proxy; 2/3 position)
3.33% WGMI (bitcoin miners; 2/3 position)
33.34% cash (most earning up to 4.83% interest at Interactive Brokers)
Vailshire's Ultra Conservative separately managed accounts (SMAs) are long-only and are allocated as follows (current base % position size):
EQUITIES (60%)
2.5% ADBE
7.5% AZO
5% CALF
5% COWZ
2.5% MELI
2.5% MSCI
5% NVR (2/3 position)
1.67% OXY (2/3 position)
3.33% QQQ (2/3 position)
7.5% TPL
1.67% TSLA (2/3 position)
2.5% TT
2.5% V
3.33% VXUS (2/3 position)
7.5% cash (most earning up to 4.83% interest at Interactive Brokers)
SOUND MONEY (40%)
0% FNV (gold royalty; 0/3 position)
3.33% MSTR (bitcoin proxy; 2/3 position)
36.67% cash (most earning up to 4.83% interest at Interactive Brokers)
Vailshire's Bitcoin Proxy separately managed accounts (SMAs) are allocated as follows (current base % position size):
95% MSTR (bitcoin proxy)
5% cash (most earning up to 4.83% interest at Interactive Brokers)
**As written in prior emails and client updates, SMA clients in FL and TX remain in cash-only positions (earning up to 4.83% interest at Interactive Brokers) as Vailshire awaits state-specific regulatory approval to begin/resume investing on behalf of these client accounts. As previously written, both CA and MN have formally approved Vailshire Capital Management, and clients in these states have been contacted with instructions on how to proceed.**
If you are a Vailshire client, feel free to log in to your account(s) at Interactive Brokers and see how your own portfolios are positioned. (It's a good idea to log in and review your account(s) at least quarterly, just to make sure your settings and demographics are up to date.)
Conclusion
Oil: A New Bull Market?
Graph (above): After a painful year, oil has regained very bullish momentum. The price is currently holding well above its 10-, 50-, and 200-day moving averages. Vailshire's underlying energy-related equities are also on a similar trajectory.
Like oxygen, liquidity generally gets taken for granted... until it suddenly disappears.
As usual, Bitcoin--the world's most free market--has sensed this liquidity contraction well before most of the stock market. If the current sideways-to-down trajectory continues, I expect equities to abruptly take the hint... which may be a painful experience for those unprepared.
As noted above, Vailshire's interest-bearing cash allocations have significantly increased as equity, gold, and bitcoin positions were trimmed in the face of slowing short-term momentum. And, given the nearly 5% interest payments we are receiving from Interactive Brokers, we are happy to hold more cash as the underlying economic conditions become increasingly fragile.
Though the future is unknowable, those who are wisely prepared will likely experience the best outcomes. I think that we are prepared well... for whatever comes our way.
Thanks for entrusting your hard-earned capital and long-term investment decisions to me and Vailshire Capital Management. I do not take this role lightly.
Living well and investing wisely with you,
Jeff Ross, MD/MBA
We hope you enjoyed today’s investor note kindly provided by Dr. Jeff Ross of Vailshire Capital Management. Visit vailshire.com to learn more.
Until next time,
The Bitcoin Layer
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