Financial Outlook March 6 2020

After several months of presenting my opinion on the markets in this space, I decided that the periodicity was capricious. For anxious personalities or traders, a month is an absurd amount of time, the same could be said for the long-term investor.

From now on this space will be updated when something about my vision of the market or Vault Assets portfolios make a fundamental change.

Literally one year has passed since I started saying that global economic conditions were worsening, that China was in no position to provide the differential growth that has kept the markets afloat, that Europe was not recovering and that the US was stretching its own economic cycle far beyond the reasonable.

Black Swans do not exist, what this unexpected events show is that neither does unicorns, and that projections of constant infinite growth are equally irrational. These events have so much impact because they arrive at times where the world is no longer in a position to face them, I mean, if the virus arrived without the Fed having made the first rate cuts, with some slack for growth to continue and a less dollar constrained world, the picture would have been different. The virus is the excuse to show the real numbers, instead of the worked ones that we have been seeing for some time. What could not habe been foreseen is perfect to explain why companies sold less, or countries couldn’t produce more.

The market had many conflicting expectations coming 2020, and once again, Bonds where telling the turth. Each event is a learning opportunity. In many ways what I learned these months is something I already knew intellectually, but I finished understanding with money at stake, and it’s this: The efficient and professional way to manage a portfolio when the economic cycle is already showing signs of coming to an end, is not shorting the S&P, it’s going long US Bonds and gold.

Generally speaking, the deflationary shock impacts on US Bonds, and the FED response impacts on the price of gold ... hence the best correlation of gold is with bond rates. Meanwhile stocks go to La la land dreaming with rainbows and puppies, and then panick.

Luckily, a lesson I learned much earlier is to keep short positions much smaller than long positions. So my long positions in gold, silver, miners and US bonds more than compensated for the losses of short positions earlier this year.

Compare the S&P with Gold since October 2018, which was when I first said to buy Gold, and with US bonds, which I told you to buy in January 2019.

Was it good not to suffer the epic fall of the end of 2018? And surely it's good not to panic now.

Instead of panicking, what I'm doing is liquidating the bond positions, and shrinking the gold, silver, mining and short positions of the Russell 2000 and S&P to one third of the original positions.

The UST rally was superb, and although it may have some upside yet, I will not re-enter unless there is an important correction, if the US government is willing to travel the negative yield territory its fine with me, but I will not remain bought in an asset of that nature and US02Y at 0.5 is very close to 0 already.

With metals, mining and short positions, things are different and with this volatility you need to be nimble. The economic variables are going to get worse, but strong intervention is surely coming, and with that, a lot of volatility. To those who are looking long term, the three best alternatives to get to the other side of volatility are Silver, Gold and Dollars (in reverse order of volatility and preferable as part of a portfolio). To those who’ll like some spice in the coming months, with the VIX north of 30 for the S&P I suggest you sell the ripe and instead of buying the deep, conversely with Gold and Silver.

I suspect that the next update will come when I think it proper to start a rotation to more risky assets.

Portfolio movements:

• Metals: I sell precious metals and mining companies to a third of the previous position, waiting for a correction to increase the position again.
• US indices: As with metals, I reduced the previous position to a third, I kept short the Russell 2000, and the S&P 500, waiting for a new peak to increase the position again. (higher risk)
• Bonds: Today I finally liquidated the bond position. I would only buy again if there is a significant increase in yields.