Portfolio Ptoday

I’ve been trading a portfolio of about 29% of my assets while waiting for the election to shake out and the future to declare itself. The other 71% is sitting in interest bearing cash accounts.

My allocations

Cash 71%

Bonds 10%

International socks 0.1%

US stocks 4.3%

Alternatives 14.6%

My efficient frontier calc is 4.1% return and 3.4% risk My actual return YTD is 6.5%. My biggest winner is BTC and Etherium, my second biggest is GLD and my third is QQQ. Other significant proportions include commodities and TIPS as a % of their respective categories. My fee structure 0.25%

I’m trading a quantitative 4 quadrant system that has me long sector funds based on rate of change of inflation and economic acceleration/deceleration. I could go long/short but Roth and TIRA won’t allow shorting except by trading long/short ETF pairs like QQQ/PSQ or GLD/DGZ. I’m not day trading but trend trading a proprietary risk range, so when the price of an asset hits the bottom of the range I buy when it hits the top I sell and either go short or wait for the bottom to buy again. This causes intra-period compounding when trading in and out of a range. In other words if I buy $100 worth and sell at $105. When the price hits the bottom of the range $105 gets invested. If it goes then to 111 that gets invested at the next low end of the range etc. The cycles happen when they happen but they do happen several times a year and so compounding happens several times a year. The system has a quantitative directional test which tells you when a trend switches from bullish to bearish in the short medium and long term so if all hell is going to break loose it tells you to get out. If you’re out and miss a tiny bit of upside, who cares. The point is to not get squished by big downside which takes forever for recovery.

It is not set and forget. It requires daily and sometimes intra-day monitoring. If you can go short in your accounts you make money on the way up and then make money on the way down. If not you make money on the way up and go flat before the way down preserving your capital.

I don’t know what real inflation is today. It’s clearly accelerating based on commodity prices but I’ve made about double my nut/mo YTD, with only 30% of my money at risk, in the craziest year in my investing lifetime, with a net asset risk of 3.4%. Good enough for me. As a 68 yo man the land of Lucy In the Sky With Diamonds, I’m happy enough with base hits. I don’t quite know how to analyze tangerine trees and marmalade skies, except I’m clear we are not in Kansas anymore despite what Larry Kudlow or CNBC says.

As things stabilize with this virus and economic disruption over the next 4 years +-, I’ll be plowing more cash into risk assets always buying low and selling high, compounding that investment while avoiding the killer draw down. As investments permit I will diversify some internationally, and across currencies because given the multi trillion money pump in the US, it’s no longer safe to be 100% tied to US or the devaluing US dollar.

Next Jan. my wife and I start SS. She will be 62 and will file for 800/mo and I will file spousal for 400/mo. When I hit 70 our combined SS will jump to 4500/mo inflation adjusted, till she hits 66 and 10 mos, at which point it will be 5500/mo inflation adjusted. I call this the SS dosey-doe, and will maximize SS payout for my wife and I throughout. Since SS is presently tax advantaged and inflation adjusted maximizing the payout is desirable when it comes to portfolio asset mix.

I still continue with Roth conversions. It was a better deal for survivors when conversion ended at 70, but I’ll take advantage of the age 72 law as it exists. We’ll see what the Dem’s are going to do about tax law and debt monetization after Bernie Sanders is sworn in as Treasury secretary. Sturgis is this weekend. 250K people are partying and not a mask in sight. It will be interesting to see the spikes in late August. Wonder if they will make book on this event on BarStool Sports?

Dem Ol’ Big Blues

It’s good to know what you’re up against. In 1996 Blue went up against Kasparov. Kasparov swept but Blue won one game. Blue won the first game, but Kasparov learned. !n 1997 the rematch Blue had been learning too. Blue won in the 6th game in 19 moves. Blue had 256 processors and considered 200 million positions per second, analyzed the probabilities and settled on most probable and contingencies. The papers estimate Kasparov had the power to adequately analyze 2 deep probabilities.

Kasparov described the computer in game 2 as “playing like a god for one moment” and he seemed to be spiritually as well as intellectually defeated. After game 5 he felt the match was already over. He said “I am a human being, when I see something well beyond my understanding, I am afraid.”

Chess is ranked on a ELO scale. 100 = a 64% probability of winning. 200 = 75.8%, 300 = 85.3%. Kasparov was ranked at 2851 and the current human, Carlsen is ranked at 2882 a 31 point improvement in 23 years. The current leading chess computer is ranked at 3496, 614 points better than Carlsen.

Wall street is geared to make money. Casino’s are geared to make money. Casino’s choose games that are, over a population of players are guaranteed to pay them for their trouble. Wall street is no different. Financial television is no different. If you think you’re going to kick big Blue’s ass (or the current reigning chess computer called STOCKFISH) with a simple little diddy of save half, invest in low cost mutual funds, have a nice life, you will be fish food. Interesting that chess computers compete amongst themselves and interesting a chess computer is named STOCKFISH.

You think we are in a V recovery? The above map is how much world countries have indebted themselves in response to COVID. First is the tiny little country of Singapore. Second is the really huge country of the United States. The US was running a debt to GDP of about 105% just marginally over the point where increasing debt has a multiplier on economic output. Now we’re talking 130% well inot the territory where increased spending causes a decrease in economic activity.

What’s all that debt buying us? Zombie companies. Companies that should go out of business remain in business through bailout, which increases debt, which increases economic drag.

In the mean time something like 25% of the trading volume (aka increased volume and volatility) today is from new retail accounts opened by people plowing their $600/wk government check into speculation, like Hertz. What the hell may as well invest in a real zombie.

My BTC and GLD is kicking butt!! Wait a minute, the DXY is down. GLD and DXY have about a -.97% inverse correlation meaning my GLD is effectively shorting the DXY so gold hasn’t so much increased in value as the DXY has decreased. A decreasing DXY = inflation somewhere in our reality. In my case it’s in GLD and BTC and meat. But the Q’s Mr Natural what about the Q’s?? Every day in every way they get better and better, until they don’t. Why do you think the US is darkest of blue in the above map yet the QQQ’s have high returns? With a 50+M unemployment and bank profits down 38% it certainly isn’t because of economic activity. Seems like Q’s might be up because of video game activity from 25M new retail accounts.

Be very clear you are playing against STOCKFISH and STOCKFISH is made of silicon. STOCKFISH like the virus has no arms and no legs. The virus has one goal, to reach maximum entropy in the environment. A computer algo like a stock market version of STOCKFISH has but one goal, to separate you from your money. What was it old Kasparov said? “It was like playing a god for one moment.” He came into that tournament expecting to win.

My favorite saying: you either live in the truth or the volatility will painfully take you there.

A Way Out?

I spend my days studying the market, studying the economy, studying the virus, and being present to those whom I love. I’ve lost complete interest in politics. Politics is nothing about reality and it’s all about dueling narratives, none of which have any relationship to reality. Since there is no viable information in the narratives, it’s a waste of time at least and mind clouding beyond that to engage the narrative.

I came across an idea for the virus which actually would work. The bodies response to the virus is nothing like measles. In measles the body creates antibody immunity for life. COVID if it creates antibody immunity at all creates antibodies which wash out in a time frame measured months, not lifetimes. A vaccine to the immune system is merely a competing infection in terms of how the body responds and if the response is not long lasting the vaccine is not protective.

It looks like T cell immunity is the real arm of the immunologic system that successfully combats the virus. That would go along with why old people and compromised people tend to succumb. Over age 30 T cell immunity declines. So that’s the dilemma. B cell immunity is only partially effective for a short time, and T cell immunity is declining due to the biology of the human condition, and yet the virus is nothing if not relentless, because it’s driven by the Gibbs free energy equation, which is a state function. State functions only care about the beginning and ending states. The beginning state of ice melting is solid water. The end state is liquid water. The process of melting is agnostic to the path from solid to liquid. If the conditions for melting exist, melting will occur until melting is completed and the second state, the state of liquidity is achieved.

The virus, not impeded by a competing vaccination, will simply progress until it’s fractal is fully embedded into humanity. We have been focusing on “testing”. PCR testing is what we have focused on. It’s a poor test. It’s sensitive but takes way too long for a result. It’s like having really slow radar. The reflected signal finally reaches you 1 week after the plane crashed and that beep cost you $200. There is a concept in fighter jet dog fighting called the OODA loop attributed to Col John Boyd. OODA stands for Orient, Observe, Decide, Act. When you are in a dog fight you are strictly limited by the physics of your plane, compared to the physics of your opponents plane. If your plane has crappy physics you’re dead no matter how good a pilot you are. If your opponent’s plane has crappy physics, he’s dead. So it’s the physics of the plane and the ability of the pilot to use the physics of his plane to Orient, Observe, Decide and Act before your opponent OODA’s on you. PCA is not on the map when it comes to observing deciding and acting, so why bother? $200 and a sense of “doing something” no matter how ineffective is why.

The next is antibody tests. Antibody tests tell you that you had the virus and your body responded or maybe not, since antibody immunity seems a weak response to infection. Also expensive to perform the amount of information contained is pretty close to zero when it comes to OODA loop decisions.

The third test is a cheap $1 antigen test. It is a test that is printed on a piece of paper and is developed much like a pregnancy test. A little spit, wait 10 minutes, get a result. 10 minutes puts you inside the OODA loop, capable of making a real time decision. The decision is if positive self quarantine, if negative proceed with your life. The test is not as sensitive as PCA but it’s data point exists inside OODA. COVID it turns out is not extremely deadly. It is MORE deadly than flu but not as deadly as MERS or Ebola for example. It’s feature is it’s extremely infective. So you can get shot with a single .44 magnum, extremely deadly or you can get shot by a .22 caliber machine gun also extremely deadly. The machine gun just takes more bullets to do the trick of a single .44. By self quarantining you put the machine gun out of business, and by self quarantining you allow society to continue. Yes you have the disease, but once infected you have the disease 100% regardless.

The antigen test though not as sensitive may be sensitive enough to make a difference in the course of the illness. If PCA can detect a 10K viral load one week ago, the antigen may detect a 100K viral load in ten minutes. The time to go from 10K to 100K may be 5 hours so an antiviral treatment can be initiated very early in the course of the disease before the systemic damage s done. I’ve studied hydroxychloraquine and zinc for example and jf given early is does have a significant effect on survival. Late treatment is not effective, so once again acting within the OODA loop is significant to the outcome.

Antigen testing could as well allow a safer school experience. Testing can be performed daily and a judgement made on suitability for attendance. If attendance is denied the child would then be identified and treated according to best practice.

Would it be expensive? Why yes. 50.1M unemployed is quite expensive. Would it require buy-in from the citizens? Why yes, we would have to start acting as a county again instead of like a bunch of 5 year olds. Eventually the driving force will be satisfied and state 2, herd immunity, will be achieved with a minimum of damage. Oh by the way social distancing doesn’t work very well as a solution. It’s just the illusion of a solution. Hong Kong perhaps the most aggressive social distancer of them all now has out of control viral growth and people are exiting the country in droves.

Did you hear the latest? United posted a 1.6B loss. Stick that in your QQQ Robinhoodie V shaped recovery pipe and smoke it. Better yet think about OODA loops with respect to narratives. OODA matters in portfolios as well.

The Thermodynamics of Mixing

Mixing is a well known concept in physical chemistry. If you mix 2 ideal gases, what is the driving force that causes gases to mix, and what causes the mixing to become uniform? Ideal gases don’t react so there is no energy transfer due to chemical change in the constituents. So what is the driving force? The answer is entropy or something called the Gibbs free energy of mixing, in a formula dG = dH – TdS. dG is change in free energy, dH is change in enthalpy, T is temp and dS is change in entropy. In an ideal gas, dH=0 and T is constant, so the formula simplifies to dG = -TdS If dG is negative the mixing occurs spontaneously and it will mix until ALL of the molecules are thoroughly mixed. Once thoroughly mixed the potential to mix (dS) reaches zero, that is when entropy reaches it’s maximum and no further mixing will occur. There are plenty of youtube videos and wiki like sites to more fully describe this process.

The reason I bring this up is this is what drives the virus? Humans are like one ideal gas. Virus is like another ideal gas. The planet is the reaction vessel. The virus mixes by embedding itself into humanity in a manner that is a similar (but not the same) set to 2 ideal gases mixing. As the infection progresses the virus attains a bigger mole fraction further increasing the drive to entropy this would be like H in the above equation becoming a negative value and since H can be a function of time dH/dt as long as it stays negative it can grow exponentially. Thinking about this relationship we have to conclude there is not going to be any Hammer and Dance solution to the virus. The mixing will occur until the Gibbs free energy of mixing goes from negative to zero. If dG goes negative again mixing will again occur. That is precisely what we are seeing. When locked down dG effectively went to zero (Rt < 1). The lock down was cancelled Rt > 0 and means dG once again goes negative and mixing progresses. A vaccine since it interrupts the virus’s ability to mix effectively forces dG=<0 interrupting mixing.

So now you have a mathematical model upon which to base your judgments. If different states have different Rt’s it merely means they are at different places on the mixing surface. It does not mean they are handling things in a superior way, since the driving force is entropy. NY once had a Rt in the 0.8 range, today 1.05. This means dG has gone from zero back to negative and infection will continue until entropy is satisfied.

In anesthesia we measured drug effect in half lives. The curve to equilibrium was asymptotic and it took about 5 half lives to reach 90% of equilibrium (when entropy is satisfied). if we just divide the population into 1/5 ths and use that number as a half life, it means 1.4B people per half life. Herd immunity is about 80% of the population therefore 5.6B people is herd immunity. We are at about 12M worldwide infections.

A vaccine is not a cure. A vaccine is merely a substitute or competing infection. The virus or it’s competing substitute will continue until entropy is satisfied to a level of 80% herd immunity. Never in the history of humanity has a vaccine been created in a couple months so banking on that is like banking on the lotto. As old people die off, young people will take over. Much knowledge and critical productivity is contained in old people that is not contained in young people so a society of young people will be left to reinvent the wheel and reinventing the wheel kills productivity. Dead productivity = a dead market, so be careful when you glibly chop off the geezers. In addition if it’s geezers who are dying what about people who survive? There is significant morbidity associated with this disease. If you infarct 50% of your LV it stays infarcted and you become a cardiac cripple. Knock off 70% of your kidney function by micro infarcts and you’re on dialysis 3 days a week. There is a condition called pump brain where protracted bypass causes cognitive decline post bypass. It’s a soft sign kind of decline but something like this brain fog seems to be happening. Children seem to be showing neurological changes on brain scans. In Hong Kong I read a report that 25% of post infection survivers had long term lung problems and SOB. Do a quick thumbnail on the increased medical cost and lost productivity of this morbidity. Seems to me dying is the least of your problems if you get sick.

If nothing else Covid dumps a load of unmeasured volatility into the system likely long term. If you get the volatility wrong you are more likely to get the truth wrong. That’ll mean you’re long when you should have been short. The next time your Governor is up quacking about Covid and what a swell job he/she is doing you can think back to the Gibbs free energy of mixing and see if they really have a clue. My presentation is about similar sets not about perfect correlation. Certainly there are particular aspects of infection that deviate the model from ideal gases, but the model points you in the right direction. If you have N, S, E, W, to choose from and the model suggests N, go N.

I ran across this video. If you think this recovers like the flu think again.

Long Vol Short Vol

As I explore the field of volatility, volatility has been traditionally accepted by me as the Markowitz defined Gaussian distribution aka standard deviation. It turns out the Gaussian only is predictable in a low volatility environment. The FED has manipulated the volatility over the past 30 or so years to a low vol back drop. Over the course of that time the act of investing has become trivial. The cost of investing today is virtually zero. I trade ETF’s and stocks, transactions often several hundred K in value at a single button press for free and I can do it several times a day getting in and out of a position. In the old days such a trade would have cost thousands of dollars for a one way trip. The ease of trading makes market participation more of a video game than serious finance.

In the past couple of years my understanding has changed from a statistical model to a game theory model. In a game theory model the actual wining and losing and the how of wining and losing matters. If the Gaussian model worked in all environments I would continue to subscribe to that, but it turns out in anything BUT what is called a “short vol” environment the Gaussian model looses its predictability. My favorite picture of the loss of predictability is this picture:

The column of hot gas up to the little circle is an area of Gaussian distribution. The movement is of low volatility and quite predictable and has a name, laminar flow. At the little circle is a phase transition from linear movement to angular movement. Like the eye of a hurricane the flow undergoes a phase transition, until turbulent flow is established and in turbulent flow anything BUT predictability is the rule.

I made my portfolio into what I thought was a diversified portfolio using stocks bonds gold and cash in a set of proportions, something like 58% stocks 10% cash 5% gold 2% BTC and 25% bonds. If you subdivided my portfolio according to risk, 58 + 2 + 25 = risk on assets called short vol and 5 + 10 represented long vol so from a traditional volatility risk perspective I had an 85/15 short/long portfolio, which means I had way too much risk. When the market crashed even the gold went from a long vol asset to a short vol asset leaving me with a net 90/10 risk on v risk off portfolio. What we think we own is often far from what we actually own. When I saw ALL of the risk indexes across ALL asset classes balloon out 500%, I decided to go to the risk free asset aka CASH till I could better understand what the hell was going on. I’ve figured it out.

Left is a portfolio of so called incredible diversity. IT OUGHT TO BE BULLET PROOF. In reality the portfolio through a long vol lens is the portfolio on the right virtually undiversified. In the past I’ve written about the Harry Browne Permanent Portfolio

Through a long vol lens the PP has 50% “risk on” (VTI and EDV) and 50% “risk off” (BIL and GLD) assets, and has 1/4 of the assets devoted to economic cycles inflation, deflation, growth and recession (contraction). Recession and deflation are not the same. Growth- recession exist along a growth axis while inflation-deflation exists along an inflation axis so you can define. Growth quadrant assets are VTI/EDV. Recession assets Cash/GLD. Deflation assets Cash/GLD. Inflation assets GLD/VTI. This description is meant to show the true diversity nature of the PP. PP results need to be viewed in real terms, not nominal terms. Gaining 12% on your stocks if inflation is 15% means you had a 3% real loss. The PP for all of it’s simplicity has thrown off 4% (or so) inflation adjusted real money/yr to spend on the buying of hamburgers, and has done so at half the market risk.

Dalio add commodities and different proportions

GLD and DBC total 15%. This portfolio has 2 durations of bonds, 20 yr and about 7 years to total 55% bond exposure. If bonds weren’t hovering at going negative I’d be more interested. Hard to justify 55% of your assets being held in accounts that purposely loose money. It has been shown however with proper re-balancing techniques 2 loosing assets can yield a positive return based on the return that re-balancing alone adds to a portfolio. The Dalio portfolio can be made from low cost ETF’s

The Dragon portfolio is different in proportion, asset mix, and cost. The portfolio is more like the PP in terms of allocation. The money is spread across stocks bonds gold and 2 new asset classes commodity trend following and long vol (which is the same long vol as above in the “diversified portfolio’ picture. When analyzed over the economic regimens presented over the past about 100 years, this portfolio survived every scenario with minimal draw down net of expenses. The 60/40 had several 10 year periods when returns were negative on a real basis and when draw down was 40+%. The other problem is SORR. If you have sequential poor performance in several 10 year epochs, your perception of performance will be like the match picture above. Everything seems alright until rotation starts. There is much bla bla bla on recency bias and diversity but a portfolio is only as good as it’s anti-fragility. A 60/40 is a fragile portfolio. It’s success entirely rests on the next 40 years being a mirror of the previous 40. This is highly highly unlikely. We are in fact in a period where everything is unraveling and the FED and the Government is desperately trying to pretend things are OK. Things are not OK. The world 7.5b people owes 334 trillion in debt never happened before. 45M are unemployed, never happened before. A deadly man made virus has been released on the world with very unpredictable consequence, never happened before. Businesses are going out of business at record rates often by bankruptcy. The numbers are closing on 2008 levels (which happened over some years) but the rates are off the charts happening in only a few months. The boomers are retired so their contribution to economic productivity is over. They will consume but at a far reduced rate. Pensions are entirely underfunded so they won’t have the money they think they’ve been promised and the other 75% of society is unlikely to step up and make them whole. We viewed the Greatest gen kindly boomers will be viewed with scorn. These among many more are objections to tomorrow being a mirror of yesterday.

The Dragon has 2 active components not in the PP or Dalio. Long vol and commodity trend following. Long vol is a synthetic tail risk insurance made by using futures. An example in the futures market you can sell a call for a certain premium say $10 and buy 2 higher strike $5 calls with the premium. If the market does nothing or falls, you pocket the premium. If the market explodes beyond the higher strike, you sell your stock to the owner of the first contract you sold, but then you buy back the market at the new higher price, BUT you own 2 call options.

Market at $90 You sell $100 option and turn that cash into 2 $115 options. The market hits $100 and your stock gets sold and you pocket the money. The market hits 105 and you buy back the market with one option and have a second which grows along with your shares Market hits 120 and your stock is up 15 plus your option is up way more than 15 because its in the money. Sell the option put the money in the money in the market and sell another call and buy another 2 calls at a higher strike. Properly adjusted this technique automatically leverages your investment based on volatility. There is a short window between 100 and 105 where you are vulnerable to a small loss and there are ways to trade around that. Properly implemented you can cover the tail risk in either tail with a very small carry cost or even make a bit inflation adjusted. Artemis seems to yield a bout 1.8% in times of low volatility. So you get your tail insurance essentially for free on an inflation adjusted basis, and the risk reduction knocks the hell out of the volatility and draw down and therefore SORR risk.

Commodity trend following is somewhat similar in it’s counter cyclical implementation. Commodities tend to follow the economic cycle and are very sensitive to inflation. So if inflation spikes or crashes and you are long or short commodities you can protect your portfolio using a rules based algo. The algo would be set such that if inflation spikes you go long commodities and if deflation you go short commodities thereby protecting the purchasing power of your portfolio. Both long vol and tend following are active processes not just passive investing, but when added to stopping losses they pay for themselves. If you own a 60/40 and drop 50% you have to make back 100% to get even. That takes time, let’s say 4 years. If you drop 20% you only need recover 25% to break even. That takes only 1/4 as much time so in a year you are even and then have 3 more years to compound while the 60/40 is still under water. In addition the Dragon is quite open to the free money of re-balancing across assets. This free money is enhanced because the classes are diversified across risk on v risk off. The 60/40 has been uncorrelated for the 40 year bull bond market since 1981. Uncorrelated bonds and stocks are not the norm.

Over 30% of the time stocks and bonds are highly correlated and moderately correlated an additional 59% of the time.

So that’s a thumb nail of the Dragon. It fit’s my market prejudice and quant nature quite well. The only issue is you pretty much have to commit all your money to the strategy and once purchased you can’t really screw around with tweaking allocations or you will screw up the efficiency.

The model I use to think about this is that of a geodesic dome. A dome is made from triangles, which essentially are a strong planar surface. Somehow you need to make those planes into a volume, It turns out the maximum volume can be had with minimum surface by joining the triangles 6 to a vertex except you need 12 vertices with only 5 triangles connected. This makes a shape of exceeding strength using the smallest amount of material to enclose the volume. That has the highest efficiency. If you consider the value of your money to be what fills the volume the dome gives you the most efficient anti-fragile structure to contain and protect your money.

Ergodicity

In the course of investing we tend to glom onto recency bias. Most recently (in the past 40 years) the bias has been “buy the dip” and “60/40 fixed ratio portfolios”. Over 100 years “buy the dip” and something like a 60/40 has gone COMPLETELY bankrupt 3 times. 40 years ago was 1980 and in 1980 bond yields were 15%. In 2000 bond yields were 7%, so back of the napkin your $1000 1980 bond became a $2140 bond in 2000. Rates are near zero now (say 1%) so your 2000 $2140 bond appreciated 7x to just under 15K. This is why people trade bonds and why if you scoff at bonds you might want to gain some insight. If your 40 year bond was a zero coupon bond you would have paid $1000 in 1980 and received 15K in 2020 guaranteed a 7% per year rate of return.

In the last 40 years bonds and equities have been uncorrelated or negatively correlated, meaning as stocks vary bonds are indifferent or do the opposite. So a crash in equities means bonds yawn or in fact bonds go up as the FED lowers interest rates. In a 60/40 environment that means bonds can save you. Let’s say stocks fall in half to 30 and bonds grow to 50 by appreciation instead of being down 30% overall you would be down only 20%. This is called ergodicity. Ergodicity is anti-fragile. It adds robustness to the system. Properly balanced an ergodic system won’t crash, where as a non ergodic system is absolutely destined to failure. Every system ultimately is non ergodic as every system will succumb to the red giant our sun will become, but barring that over the course of a single lifetime, you can design an investment system that is ergodic.

It turns out over 130 years 1885 to 2015 stocks and bonds we anti-correlated only 11% of the time, moderately correlated 59% of the time and highly correlated 30% of the time. It just so happens anti-correlation has been the rule for the past 23 years, the period when most of us got rich. In the period from 1965 or so to 1997 most of us did not get rich, but most of us were in kindergarten so we were oblivious.

In 68, I was 17 and my father had a building supply business that failed. In about 65 we had a recession especially in the mid west. I was savvy enough to understand what was happening. My father’s business was quite fragile based on economic conditions. I then lived through stagflation in the 70’s and the FED reaction of increasing interest rates in the 80’s. To me that meant my medical school tuition went from 6800 to 8600 in 2 months and then from 8600 to 16,000 in one year. By my 2nd year I was basically out of money. I had enough saved in 1981 to pay for the whole thing and by 83 it was all gone, frittered away by inflation. Color my plan fragile, so I went into the Navy because no way was I going to take out a student loan with 20% interest. The Navy plan was anti-fragile. I got paid $700/mo as an Ensign and all school expenses. They paid 2 years and I served 2 years. The government soon realized they could lever their position to a 1:2 or a 1:3 position but my commission was unlevered at 1:1.

So what about retirement? What is our future? Is a 60/40 fragile or anti-fragile (much less an 80/20 90/10 or whatever foolishness you can cook up.) What kind of portfolio has a chance of being ergodic over the course of 100 years?

The answer of course is to study diversity since independent degrees of freedom are the basis of an ergodic portfolio. What the hell does that mean?

In 2008 we tried to construct my portfolio using a long volume ETF called the VXX. The portfolio was long stocks, long bonds, long gold, long commodity, long EM, and long vol in the form of VXX. VXX and commodities and EM was the wrong choice, but the idea was the right idea, and is still the right idea.

Chris Cole at Atremis capital management has a portfolio made up of

long stocks 24%

long Bonds 18%

long Gold 19%

long Volatility 21%

long commodity trend following 18%

This is a radical portfolio but it is ergodic. It back tests over 100 years as never failing. despite its cost. It is not a cheap portfolio to own. Long vol and CRB trend require active management. Long vol means creating derivatives in combination when there is asymmetric risk reward, where you can afford the carry cost to have a portion of your portfolio that explodes to the upside in the face of explosive downside. CRB trend is a means to follow momentum in either direction. CRB is an asset the government does not manipulate, hence the reason oil futures went negative a couple months ago. The government had no bid on oil, so oil actually behaved in a free market non manipulated fashion. As we see commodity prices rise in the likely coming stagflation being long commodity trends will counter balance the fragility of the stock market fomo. If you bought Hertz because it was cheap, I guess you missed it’s also dead.

This kid of portfolio is like the Harry Browne Permanent Portfolio in that it requires life long adherence for it to pay off. You can’t screw around trying to be a real estate tycoon. It’s advantage is it’s long term risk because of its diversity is minimized and of you have a lower risk at a given return you can withdraw a slightly greater draw without suffering the increased SORR.

I’ve always been attracted to the PP as an investing strategy, but to date I’ve sought the feigned security of the crowd and recency bias even though I tend to be on the perimeter of that perspective. I believe the regimen has changed. Regimens do change which is why the 60/40 went bankrupt 3 times in 100 years. I think the future is quite bleak and won’t look like the past 40 years much at all. I think the political landscape is bleak and there is much damage to be done with the stroke of a pen. I do know I absolutely can’t afford to stay in cash.

As I work through this I’ll likely write more. The geodesic dome is a structure based on the distribution of triangles across a pattern of vertices sometimes hexagonal in pattern, sometimes pentagonal in pattern dispersed across the face of a sphere. What you get is a inherently strong thin walled structure capable of distributing stress across the perimeter of the sphere the structure encloses. A Geodesic dome encloses the greatest volume for the least surface area which can be viewed as a measure of efficiency. Conceptually this is along the lines of how I view this kind of portfolio. Light weight, strong, efficient, in a word anti-fragile in the face of multiple insults.

DXY Crash

The DXY has crashed It peaked in march and now is down 6% from the high. This means it takes more dollars to buy the same value. More dollars for same value is called inflation. More dollars for same value means stock prices go up but the value contained does not. Effectively this is a buy high result and is the basis of FOMO. FOMO is a greater fool strategy. You buy now in the hopes a greater fool will buy from you later. Passive index investing is a greater fool strategy as well.

Hertz is a perfect example. DEAD company with DEAD stock being bid up to 5 bux a share in a greater fool strategy, because there is always some dumbass who will buy my dead stock at 7. There’s always a dumbass until there isn’t and your $5 stock is now worth $2. In the mean time the cost of bread goes from $2 to $5 because inflation. The dollar crashed so by definition a less valuable dollar buys a lower value of goods. The smart money would have bought wheat or grocery stores or bread companies. In a time of inflation Shell oil might look good also.

In a time when GDP is crashing AND DXY is crashing, bad juju.

In addition I was just on a call regarding the economy. It turns out we now need to take out $7.50 in credit for every $1 increase in GDP. Now that’s what I call diminishing returns.

Here is an Example of Financial Engineering

Dow is down 5.16% as I write. I came across a video that explains some of how as investors we are manipulated by our government. We read a headline number like GDP or unemployment and think we understand what it means and may be use it as a way to judge risk. But do we really have a clue? You may not agree with George, but why did the government back in the 90’s change the way it did calculations?

What Does Equity Price Measure

In the late 90’s I was day trading options. The late 90’s were the lead up to the .com crash. In the early 90’s small caps exploded as tech blew up. I knew guys who made 10M on things like Compaq and Sysco and Sprint buying stock at 10 cents per share. Later they levered the hell out of it and we got Long Term Capital Management. LTCM blew up and the NY banks covered the leverage. The market narrowly missed catastrophe. Next cake .COM and stocks with no property and no earnings, not worth anything were trading in the stratosphere. This is when I was trading options. JDSU was typical. It would undergo a stock split every 90 days with the stock eventually reaching 150 bux so a single share might split 8 times in a year and the price soared to 150 bux a share. Eventually the party was over the musical chairs were filled and JDSU did not have a chair. The stock went to $2 and the stock did a 8:1 reverse split. I made money trading JDSU till I lost money. I still don’t have a clue exactly what I owned in the stock from a value perspective, but what I cared to own was access to cash flow. JDSU LMNOP QRSTUV whatever, all I was doing was trading cash flow and momentum. It’s like sky diving. The acceleration is breath taking and only ends once the ground is hit. By then you better have risk management in place. If you don’t you will bounce. That is what sky divers say happens to people who “go in”, that is suddenly decelerate without deploying their risk management. I’ve seen bounces, they are not pretty. Pretty much everything gets crushed.

I didn’t manage my risk very well in 1999 and managed to loose 1M. I made it back and managed to loose that same 1M in 2008. I made it back as well. In 1999 I did have what I thought of as risk management. I didn’t know much about bonds but I did own some muni zero coupon strips that were paying 7.5%. I had GE. GE got to 57 bux in Aug 2000 AND NEVER RECOVERED! It’s taken GE 20 years to die but dead it is. I owned Fidelity Countrafund It was 6.5 bux in 1999, went to 7.8 bux in 2007 and is about 14 bux today. I sold Contrafund around 2008 but had I held it over 20 years I basically would have doubled my money in that period. That’s a 3.5% rate of return over 20 years dividends reinvested. I did own some Fidelity tech mutual funds in 1999 that actually went out of business. I thought I owned diversity. The interesting thing about 2000 was everybody and their brother was a trader. My contractor who had dropped out of high school had 1M in the market and was filling me in on his book out on my driveway back then. Didn’t turn out so well for either of us, but my risk management was better than his.

In 2005 or so I was having coffee after Church talking to a welder. He owned 5 acres of scrub land out in the sticks near where I live. He was telling me how the 5 acres across the street from him had sold for 90K an acre. I said 90K an ACRE? SELLLLLL I said!! I had priced 10 acres a few years earlier for 4.5K an acre in a much better location and I couldn’t get myself to pull the trigger so no way was 90K an acre reasonable by any stretch. He just looked at me and said: what if it goes to 120? I live in rural FL out where I live there are no lights to pollute the night time sky. My neighbor to the east is the Atlantic ocean so when I get up to pee the eastern sky is magnificent. That same 5 acre plot today would fetch 9.5K/acre. If I was in the market I’d wait a year and could probably get it for7K.

This time feels very much to me like 1999 and 2005. High school dropout contractors and welders are all tycoons. Not to diss them at all. They are my patients neighbors and friends. They go to my Church and shop at my Walgreens. So the question is what does price actually measure these days?

I looked at the market today and saw this:

I’ve read that there are several million new brokerage accounts that have been opened since the crash in March. I’ve read that many peeps on unemployment ate making more on unemployment than they made working. I read that peeps are getting an extra $600/wk. How is it the NAS closes up .29% while the Dow closes down 1.09%? That’s a 1.4% spread! The answer is this is 1999. This is my contractor sitting at home trading QQQ waiting for the job to come back. This is JDSU. This is 90K/acre. This is where the 4T in stimulus went. This is living in a video game called “Stock Market”. This is every fund manager having to go “all in” or else be left behind and loose his job. The laws of gravity have not been repealed. I just reviewed a side deck of world wide demand and world wide production and world wide shipping (supply chain) on a region by region basis. This deck is what life is like outside the video game.

Here is an example Singapore. Singapore is a city state Island in south Malaysia. It is a wealthy country and has 6M people and had 25 Covid deaths with 38K infections. Here are a couple charts of what’s going on in Singapore

Recreation is down 65% and work is down 60%. This is common across the world. Nothing anywhere is gangbusters. The title of the report is “Slowly Recovering”. Is Singapore consistent with a NAS of 10K? What happens to QQQ when the stimulus rolls off in July and NAS has a down day? What does price measure? Rate of change or value?