My Entire Investment Portfolio

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My Portfolio

Let's cut the bullshit and get straight to the good stuff. We can work backwards from there.

• I have moved to underweight equities with a focus on quality and energy.

   

  (Quality doesn't just mean dividend stocks. Far too many people are falling for that trap at the moment. As everyone flocks to the 'insurance trade' to protect in a slowing economy the very value that is meant to protect you gets eroded. Yes Coca-Cola is a stable and profitable company. That doesn't mean it's good value at a 30 P/E. Make sure your not blindly reaching for 'value'.)

   

• Half of my holdings have been moved into short-term treasuries. Duration risk is difficult to justify given the inverted yield curve, all my exposure is at the short end of the curve.

   

  (5% return on an arguably risk free investment is rare so take the easy lay-ups when they come. I hold mine in BIL as I trade in USD.)

   

  (For those looking for 'risk-free' yield in Euro's, EBMMEX is probably as good as your going to get. 3% is still about 100X what your getting from you bank deposit account with arguably less risk.... It's a no brainer)

   

• I remain overweight International Stocks and Emerging Market names relative to US equities. (This is rare for me)

   

• The credit spread on offer across the corporate bond space doesn’t compensate for the added credit risk on offer. As a result, I have zero corporate bond exposure.

   

• I also hold roughly 20% of my investments in a short-term trading portfolio mostly made up of distressed financials, tech and mining, but I would categorise this as degenerate gambling more than investing and not something I necessarily recommend doing.

A Surprising Start

I have always tried to focus any investment updates on what I think will happen as opposed to just rambling on about what has happen but for the sake of completeness, let's do a quick recap.

YTD Overview

• Green all round for equities as last years worst performing stocks continue to be the best performers in 2023.

• Volatility in the bond market following the banking crisis has seen the 2-Year Treasury drop almost 1% in the last month.

• European equities have continued to outperform while the ‘China reopening’ lost steam over recent weeks.

• The market rotation was clear for all to see as energy and financials lagged while technology outperformed (+20.3%).

• Money market Funds have led the way in 2023 with $460 Billion of inflows in Q1 vs. $27 Billion across Equity ETF’s

• Bitcoins 'stealth rally' continues, briefly hitting $30K and now up 66% in 2023

What Happens Next

The fickle nature of market sentiment has gone into overdrive this year.

The narrative has jumped from hard landing to soft landing to no landing at all. We now exist in this zero gravity economy where the outcome appears inevitable, but the timeline becomes increasingly unknowable.

Throw in a banking crisis, a frozen housing market and ‘De-dollarization,’ and you’re only about halfway there.

To quote Tom Peter’s

Deciding exactly what happens next is a migraine-inducing endeavour. Endless variables result in a comical game of ‘it this, then that’ with each scenario as likely as the next.

You could argue the minutia all day, but in order to get some clarity, we need to focus on the economic outlook from a macro perspective.

So, Instead of regurgitating what has already happened in markets this year (I’m sure you have heard enough from ‘banking crisis experts’), here are 9 of my base case views that have determined my current position in the market.

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1.Inflation

U.S. Inflation peaked in June of last year. While the rate is still above the Fed’s target of 2%, I think I see a trend emerging....

• June 9.06%

• July 8.52%

• Aug 8.26%

• Sept 8.20%

• Oct 7.75%

• Nov 7.11%

• Dec 6.45%

• Jan 6.41%

• Feb 6.04%

• March 4.98%

As mentioned in my first 2023 outlook, my view was that inflation would trend lower, reverting to 2-3% by the end of summer 2023. Whether inflation neatly stops at this level remains to be seen.

I Expect disinflation to continue in the coming months.

2.Interest Rates

Evidence that Inflation is cooling has created the expectation that the hiking cycle could be coming to an end.

The Fastest Rate Hiking Cycle in History

The market is currently pricing in a <90% probability of a 25bp rate hike in May, I believe this will represent the top of the hiking cycle.

After years of being starved of income, the end of the hiking cycle represents an opportunity for investors to generate 5% ‘risk-free’.

This risk-free rate was unthinkable just 18 months ago and should be welcomed with open arms.

I'm not sure who needs to hear this but.... STOP LEAVING YOUR MONEY IN THE BANK.

3.Labour Market

‘Cooling but still hot’ is the term being thrown around to describe the current state of the labour market.

Job openings fell to 9.93 million in February, down from 10.56 million in January. This represented the lowest level of job openings since May 2021.

Job openings are clearly trending downward, but there are two key points to note.

• Job openings are still well above pre-pandemic levels

• Despite slower economic activity, the cooling in job openings hasn’t been accompanied by a notable acceleration in layoff activity. U.S. employers laid off 1.5 million people in February, which is actually below the pre-pandemic trend.

I Expect the current downward trend to continue. Whether employment numbers will continue to fall without dragging us into a recession (soft landing) remains to be seen.

The consensus view is that the labour market is still ‘hot’.

My View - It's lukewarm at best if you look at the numbers from a 3 months moving average standpoint.

If the current rate of change continues, rate hikes will quickly turn into rate cuts.

4.Earnings

Earnings season kicked off last week, (as I type this, Tesla has just reported a 20% drop in the YoY net income, let’s hope that’s not reflective of the entire market)

In my previous outlooks, I highlighted the likelihood for earning projections to contract significantly.

Since then, consensus estimates have fallen considerably, with the S&P 500 now expected to contract for the second quarter in a row, as shown below.

I still believe some of these estimates remain optimistic in a recessionary environment and could fall further.

Still, it’s important to remember the stock market is a forward-looking machine, and stock prices usually start recovering months before earnings bottom.

I expect prices to come under pressure again in the second half of the year but some of this has already been priced in.

5.Systemic Risk

The financial reproductions of higher interest rates have come knocking.

Liquidity issues posed by the latest banking crisis have been backstopped but this is unlikely to be the last economic crack that appears.

Much of the impact of the rate hiking cycle operates on a lag, meaning the negative economic effects of higher rates are yet to play out.

The ’higher for longer’ narrative increases the likelihood of something breaking in the second half of the year.

6.Fewer Winners

Stocks have done well year to date but the top line performance of a few big winners has masked the underperformance of the majority of the market.

This chart tells you pretty much everything you need to know

This narrow rally isn’t exactly a characteristic of a healthy market.

You’re not as diversified as you think.

7.The Real Estate Market is Frozen

Existing home sales in March (4.44 million SAAR) were down 2.4% from the previous month and were 22.0% below the March 2022 sales rate.

This marks the nineteenth consecutive month with sales down year-over-year.

Despite the steep decline in home sales and rising inventory, prices have remained elevated.

The median existing-home price for all housing types in March was $375,700, a decline of 0.9% from March 2022 ($379,300)

As it stands, with mortgage rates at between 6-7%, housing is currently as unfordable as it has ever been. Still, prices are yet to meaningfully adjust as the stand-off between buyers and sellers continues.

As I have said before, the frozen housing market will continue to place a chokehold on the economy and despite the supply constraints, house prices will continue to come under pressure as long as mortgage rates remain at current levels.

8.A Strong Starting Point

Yes, the economy is slowing, but it is slowing from record highs. Financial Strength post covid has allowed consumers to absorb much of the bad news in the market.

Household debt as a percentage of disposable income has declined 50% since the 2008 financial crisis, and household leverage is currently at levels last seen in the early 1980s.

No panic stations, just yet.

As the unemployment rates rise, consumer spending will slow down, but the starting point for U.S. households is still strong. This financial flexibility will help us avoid the capitulation that many of the apocalyptic doomsday economists are predicting.

9.The 30,000 Foot Macro View 

Last but not least, we must take a step back and look at where we are in the credit cycle.

Public and private debt levels as a % of Global GDP jumped from less than 220% to 350% in just a few years.

Total Global Debt Surpasses $300 Trillion

Stagnant labour and productivity numbers were no issue when you could simply offset any shortcomings in GDP with an ever-increasing amount of cheap debt.

But now, as we grapple with inflation and higher interest rates, the spending spree is officially over, and Central banks are flipping the money printer into reverse.

Easy money is over, and the contraction in credit will re-adjust valuations going forward.

(It’s worth noting in Q1, G5 Central Banks ended up printing money despite ongoing QT programs in place (bank funding facilities and yield curve control in Japan etc) . Going forward, I expect this surprise financial money printing to stop and the purse strings to tighten again.)

Putting it all Together

Inflation is falling, the jobs market is slipping, growth is slowing, earnings are contracting, the real estate market is frozen an manufacturing data paints a bleak picture.

But we knew all that and markets are still in the green?

Thankfully, consumers have remained resilient and are coming from a very strong position with record unemployment, low debt to household income ratios and strong savings rates still intact following record pandemic savings rates.

My base case remains unchanged.

1. Forward looking macro indicators and negative money creation point to a global recession in the back end of 2023 but a recession does not mean ‘economic calamity’.

    

2. Some short-term money is on the table as the potent mix of momentum, FOMO, and liquidity combine, but the risk/reward is difficult to justify.

    

3. With a risk-free rate of 5%, equities offer more downside than upside in my view. Long-lasting bull markets require rapidly expanding valuations and/or strong earnings growth. I don’t see evidence of either in the data.

Anything is possible, but the risk/return is poor for investors so I remain defensive for next 3-6 months.

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