April 2021 Thoughts and Insights
We are excited to start our letter off with the news of a fully vaccinated staff at DTIM!
As we enter the second quarter, global economies are looking toward reopening and recovery. We expect to see production ramping up and global trade revitalized which means a continuation of the Quad 2 reflation and growth economic cycle for our portfolios. (See the chart at the end of this letter as a reminder of the Quads.)
We will maintain our full allocation to equities holding Technology, Financials, Industrials, Materials, and Healthcare. Over the quarter, we added some consumer related Covid rebound positions in Expedia, Cinemark and Match.com as well as an ETF in Energy (XLE). We also took profits from our defensive holdings in Utilities and Staples (Conagra) as well from our positions in China. We continue to own commodities (DBA) and Silver (SLV) in our equity portfolios which do well with Quad 2’s increasing inflation metrics.
In anticipation of higher rates (remember that prices decline when rates rise), over the past year we improved the credit quality of our bonds, sold our longer dated maturities, and held on to our higher paying preferred stocks. This approach has proved to be solid, minimizing possible losses in the face of the largest quarterly increase of the US 10-year Treasury yields in 30 years. For reference, the yield at the beginning of the year was 0.93% and moved to a high of 1.74% in mid-March.
The major concern is that the unprecedented amount of fiscal stimulus coinciding with pent-up consumer demand will catalyze an inflation overshoot faster than the Fed can react by raising rates. The bond market is pricing in rate hikes about one year earlier than indicated by the Fed, creating a major disconnect between the Fed and the US bond market. In one year, $5 trillion of fiscal spending has been announced with more on the way including President Biden’s proposed $4 trillion infrastructure plan. The US is on the path of unprecedented spending, to a scale not seen since the New Deal of the 1930’s. However, the market is currently focused only on the near-term economic boost in spending on growth and yield levels. This brings us to gold…
The main underperformer in our portfolios so far this year is our position in gold. Gold prices finished March at $1,708, closing off a difficult quarter following an amazing 2020. Despite the near term positive economic outlook for Quad 2 where gold underperforms, the long-term risks associated with trillions of dollars of economic stimulus, mounting debt, and the government’s long-term plan to weaken the dollar to pay down the debt, we will remain committed to our gold positions. Gold does well in both Quads 3 and 4 when growth declines.
Thoughts on Bitcoin
Bitcoin/crypto currencies seem to have made their way into the mainstream with not only retail investors buying them via PayPal but also companies including Tesla now owning large positions on their balance sheets. Several major Wall Street banks have also opened conversations on their validity as a currency. There certainly is a trading opportunity at present for individual investors; however, we believe there are too many risks associated over the long term to add a position to our model portfolios. The main risks focus on regulation, taxation, and storage. There are current applications filed for Bitcoin ETFs at the Securities and Exchange Commission, but so far they have consistently denied all requests. Grayscale, ticker GBTC, does list a synthetic version for trade available at Schwab if “client directed”. We are closely following these markets and are happy to discuss them with you in much greater detail if this is an area that you are interested in.
To conclude, with markets at all-time highs, we are watching very closely for signals that will indicate a shift to the next economic cycle when growth declines, either stagflation-Quad 3 or deflation-Quad 4. The major indicators include the direction of the 10-year treasury and the US Dollar. Inflation, and especially out of control inflation, is a major risk we need to be mindful of. Every day we note the closing prices of the 10-year and 2-year notes, the S&P 500, Russel, Nasdaq, Oil, VIX, Gold, China, Bitcoin, Microsoft, Apple, Amazon, and Tesla, and watch the trends in the rates of change with the inputs from Hedgeye. In their 15 years of operations, they have never missed a signal move to Quad 3 or 4, and we feel prepared for this possibility with our processes.
As always, we remain dedicated to serving you and your investments. Please feel free to call or write with any questions or concerns you may have. Also, we would love to have you in our office for an in-person meeting when you feel comfortable. We are incredibly grateful for your trust in us.
Opinions expressed herein are those of their writers alone and are based on information believed to be accurate at the time. Danda Trouvé makes no warranties as to the continued accuracy of such information.