H1 2017 Performance Report

Central Bank domination of Economic policy and markets continues and accelerates

Creates escalating economic and market dysfunction

Unprecedented challenge for long term investment

Yield curve and TIP suggests policy is already overly tight

While the market is indicating that inflation is rolling back down

My role is to provide the best possible structure and execution for long term investment success no matter what

This means LOW RISK, HIGH ALPHA( Return to risk), ADAPTIVE and UNIVERSAL Investment approach.

Full structure and range of investment options which are all cyclical and tactical

Permits investors to choose their own Cyclical Trend Aggregation

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Central Bank domination of Economic policy and markets continues and accelerates

The chart above shows the current incoherence and absurdity of current market relationships, which can only be accounted for by the astonishing level of central bank intervention. All primary market growth indicators have made new lows since November 2016, except Equities which almost exactly match G3 central bank asset purchases.

All investors need to think very carefully about what current markets conditions really reflect. If they are an aberration, then solely examining short term performance returns is more likely to be misleading than helpful.

It is crucial that investors focus on their strategy. Central bank intervention is distorting everything and has a dreadful track record, with 10 year average US GDP growth now at an all time low, after 10 years of accelerating central bank intervention! It ain’t working.

10-Year Averages of Annual Growth Rates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At first glance it might seem impossible for central banks to continue to accelerate their extraordinary balance sheet expansion. Yet this continued to accelerate in H1 2017.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Creates escalating economic and market dysfunction

Central banks do not see that they have any other option, for 2 very simple reasons.

First, without exploding federal debt the US economy is now in a permanent recession.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

So Federal Debt, as policy makers see it, has to explode higher to deliver even weak growth.

The Financial Plan and the Investment Problem

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As central banks see it, this debt mountain simply has to continue and be continuously financed. Now we see why central banks don’t see any alternative to perpetual and accelerating asset purchases.

Confidence is critical for this to continue, so an economic narrative is also essential to sustain this bizarre economic predicament. Furthermore, asset purchases need to sustain higher equity prices to reinforce the notion that this is successful economic policy!

Central banks have now essentially fully adopted a third mandate to add to growth and inflation objectives. This mandate they call “financial conditions”, which essentially permits themselves to do almost anything.

http://www.zerohedge.com/news/2017-06-26/feds-third-mandate-official

Regrettably,  it should be clear that even with unprecedented intervention, that :

1. Long term US GDP growth is now the lowest in history.

2. On the Federal Reserve’s own data published in June 2017, the more they do the more long term growth declines.

Unprecedented challenge for long term investment

The header chart shows extreme divergence between central bank activity and equity performance on the one hand, and on the other a totally different outcome for just about everything else. This suggests a central bank takeover of equity markets on the positive side, meanwhile all the other indicators show that growth and non-equity markets are clearly signalling the exact opposite reality.

As a consequence, passive equity investing has never seemed so easy and prosperous, and equally active managers have never before experienced a worse set of circumstances, as market function and policy coherence has almost completely collapsed.

Hedge Funds over recent years have, in general, found it nearly impossible to generate alpha (high return to risk) relative to usual benchmarks.

http://www.zerohedge.com/news/2017-04-17/dear-hedge-funds-who-responsible-your-deplorable-returns

Yield curve and TIP suggests policy is already overly tight

30 year yields are breaking down to new multi year lows relative to 2 year yields

 

 

 

 

 

 

 

 

 

 

 

 

 

While the market is indicating that inflation is rolling back down

 

 

 

 

 

 

 

 

 

My role is to provide the best possible structure and execution for long term investment success no matter what

Never is a long term time, but I think it is safe to say that never before have assets prices diverged to this degree from GDP, and in addition, when they have in the past, GDP has remained strong until after the bubble has collapsed. 10 year GDP growth is already at an all time low!

Central Bank Bubble

 

 

 

 

 

 

 

 

 

 

 

This means LOW RISK, HIGH ALPHA( Return to risk), ADAPTIVE and UNIVERSAL Investment approach.

LOW RISK

Although, recent volatility has been low, this is a function of central bank intervention not the long terms risks now embedded into the markets. The historically extreme divergences of markets and GDP growth clearly point to extreme risk ahead. Therefore, in general risk should be low at this time.

ALPHA

Investors should always be looking for alpha, return relative to risk, from their investment manager, so it is important that this too is being analyzed and delivered.

ADAPTIVE

Central bank policy is not only clearly failing, but it is also extremely opaque. So it is hazardous in the extreme to believe you can be sure know how they are conducting and changing policy in real time. So your asset management needs to be  constantly and automatically adaptive.

 

UNIVERSAL

Both markets and economic policy are extremely unstable and becoming more so as central banks double down. So it is not clear how this will unfold. This means that current conditions could continue in the short term, but at the same time dramatic reversals could happen at any time, and from all time extreme levels. This means that investors need to have constant access to a combination of strategies for very different circumstances.

These strategies need to be highly tactical so that they can remain in place even when they are out of sync with current conditions. Only tactical strategies can minimize under performance in adverse conditions as well as maximize gains when conditions turn more favorable. In this way they generate alpha over the cycle.

The results from the first half of the year are encouraging (if not attached, they are available on request)

Given the circumstances, and wide variety of models that have been introduced and developed, I believe the attached results are in line with the above objectives.

The worst performers were CD active and CD passive. This is to be expected in an interest rate rising period given the high Treasury exposure, and also gold mining exposure, which had a very poor 2nd quarter. Nevertheless, CD passive still had a postive return with an offsetting equity allocation. CD active has been more focused on  long term options on gold mining stocks, where the long term prospects are I believe by far the most favorable in all markets.

If there is any change in circumstances in central bank policy, either towards an easier stance, or cracks in current policy, continued dollar weakness … I would expect both these models to very quickly outperform all domestic benchmarks. So these are very valuable components for any portfolio.

The most outstanding Alpha model has been the High Income/Low Risk portfolio, which has produced near equity returns with bond market levels of volatility.

The CD Bond and CD  Asset model continue to provide very solid low risk returns as well as a high level of adaptability to the whole portfolio.

The 3 equity models, Equity Aristocrats, Venture Tech, and Quant Agora have all had more of a following wind in the first half, and have all performed well so far.  In addition, it should be emphasized that they all have significant downside protection should conditions change.

Full structure and range of investment options which are all cyclical and tactical

More information will soon be available on all these models, as fully compliant reports are provided. Already these models provide a wide range of options for allocation, which fulfill the multiple objectives set out above. The Belpointe structure provides an extensive platform for development and execution of a wide range of investment options.

I believe the costs, flexibility, transparency and risk management of the investment models provides the most up to date technology and advanced asset management strategy available today.

Permits investors to choose their own Cyclical Trend Aggregation

It is important to make clear that investors need to understand the extraordinary circumstances we now find ourselves dealing with. It is crucial for long term success to appreciate the context, focus on the long term and understand that in the current extreme and unprecedented circumstances it is important to be creative about your investment structure. As discussed above this is a time for low risk, high alpha through the whole cycle, adaptive, and universal approaches.

It is far more important that you can see a long term plan through all the turbulence we are likely to see in the coming years than be overly focused on short term recent returns. In any bubble, spectacular returns can disappear very rapidly.

Does your Investment Manager understand the difference between sound and unsound financial planning?

 

 

 

 

 

 

 

 

 

 

 

 

 

The Supernova Model Of Financial Collapse

So it is key to have all the tools for the whole cycle and use them appropriately to do well over the long term in challenging circumstances.

This is a time when investors need to be engaged and I will continue to provide more information on all of the models I provide. I hope it can be understood that there is already a wide range of investment options to express the most suitable allocation for any investor. These are all tactical models which all have a risk managed and adaptive structure to handle the whole cycle.

By combining models you should be able to further increase alpha (return for risk). I call this Cyclical Trend Aggregation.

My objective is to provide multiple tactical models which:

1. Each demonstrate alpha.

2. Can be combined to further increase alpha.

3. Can be combined to match any risk requirement accurately. This increases the likelihood of any investor achieving their objectives with the lowest possible risk.

I believe the initial performance so far is promising as a number of models already suggest high long term alpha performance.

 

 

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