Assets for All Seasons

The other night I found myself watching a replay of the final round of the 2014 British Open at Royal Liverpool, won by Rory McIlroy. The closing stretch of holes that day were experiencing some significant wind, with the par 5 16th & 18th holes being downwind, they were mere pushovers for the world’s best golfers.

During the telecast, Curtis Strange made an offhand but important comment.

To paraphrase:

“In links golf, you walk by a fairway bunker and wonder why in the world they’d put one there. Your drive goes 70 yards past it. Then one day the wind blows the opposite direction and you find yourself in that bunker, and now you know why.”

As a resident of Charleston, SC with several Seth Raynor courses in the city, I appreciate this type of genius in course design. While Mr. Strange made a statement specific to golf course architecture, it has an important context in investing as well.

When a family hires us to assemble a portfolio of alternative investments, our goal is to generate positive performance for them regardless of the environment.

To accomplish this, we build a unique combination of assets. For us, it’s less about diversification and more about correlation. You can own a bunch of different things…but if they all end up going the same direction at the same time, or none of those investments “steps up to the plate” during a downturn, then your diversification has not served you well. For us, correlation is the holy grail in managing risk….you want to not only own a handful of various assets but you also don’t want them all moving in unison. What this means for us is invariably we will own one (or more) of those small random bunkers that you hit your drive 70 yards by day after day. However, when the wind ultimately turns the other direction, you want that “bunker” to support the portfolio in its intended role.

The hard part of this type of investment strategy is being OK with having that random bunker in your portfolio…taking up space…not keeping up with everything else you own. If that investment is put in your portfolio intentionally by folks who truly understand correlation, then its job is to deliver on that rare day when the wind changes direction.

Finally, here is what’s on my radar:

the consumer

A lot of pundits & experts like to talk about the resiliency of the US Consumer as our economy has seemingly avoided an all-out recession….for now. However even if consumer spending has yet to fall off a cliff it’s important to asses where the spending is coming from. Are consumers sourcing these dollars from income, or savings? Obviously income signals a much healthier market….but what if the source is retirement accounts? That is a troubling sign because at some point the music has to stop.

It appears the uptick in early withdrawals from retirement accounts is accelerating quite a bit, never a good sign. As we all know, housing costs remain extremely elevated which continues to hammer consumers.

macro / election

Trying to predict how markets will react to election outcomes is an entertaining, often feeble exercise. Most wirehouses (Goldman, Merrill, Morgan, JPM et al) like to put out predictions in an attempt to stay in the news cycle. You can also expect no shortage of “expert” opinions from CNBC talking heads as well.

One of the more recent yet wild sequences was in the aftermath of the Clinton/Trump elections, where the futures market saw insane overnight swings. Carl Icahn managed to profit but many weren’t so lucky.

Currently I feel it’s impossible to trade the election outcome as we aren’t even 100% certain who will be on the Democratic ticket. The events of July 13th even put the Republican ticket in doubt momentarily…scary times.

Whichever party wins though, it does seem that we could perhaps see continued inflation. The Democrats will likely continue to spend money we don’t have, while Republicans will seek to cut taxes and lower interest rates… pushing asset prices higher. However, to blindly bet on all assets in my mind is very foolish. As long as interest rates remain in their current splash zone, one can still be paid pretty well to sit and wait.

bitcoin

While crypto alone won’t determine the outcome of the election, those of us who follow the industry closely have been watching to see which candidate(s) are for or against the growing asset class. To date, it appears the Biden administration has a highly cautious stance that many are reading as “anti-crypto”. Meanwhile, Trump has embraced Bitcoin enthusiastically (even though I doubt he understands much about the asset) even going so far as accepting campaign donations in several digital assets.

Bitcoin has seen a volatile few months and with Germany having now fully depleted its Bitcoin reserves some of the selling pressure may have eased for now.

The other day I happened upon this great chart illustrating the historical rallies of Bitcoin after US Presidential elections. To me this type of market behavior seems to be less about a President’s stance on the asset but rather the US political system seeing some resolution i.e. the conclusion of an election.

Institutional investors in particular like waiting for clarity….however given the events of the last few days your guess is as good as mine as to how things might unfold..

Clark Gaines focuses on alternative investment strategies at Almanack Investment Partners, and is based in Charleston, SC.

Please refer to our disclaimers below!

This communication has been prepared solely for informational purposes and is not an offer, or a solicitation of an offer, to buy or sell any securities or products or to participate in any product or trading strategy. No sale of securities will be made in any jurisdiction in which the offer, solicitation, or sale is not authorized or to any person to whom it is unlawful to make the offer, solicitation, or sale. If any such offer of securities or products is made, it will be made pursuant to a definitive confidential offering document or other documentation which contains material information not contained herein and to which prospective investors will be referred. Any decision to invest in such securities or products should be made solely in reliance upon such documentation and not this communication. .Information contained herein is based on data obtained from statistical services, company reports or communications, or other sources, believed reliable. However, we have not verified this information, and we make no representations whatsoever as to its accuracy or completeness.  The views and opinions expressed in this communication represent those of Clark Gaines and should not be construed otherwise.Investment Advisory products and services are being offered through Almanack Investment Partners, LLC an SEC registered investment advisor. For additional information about Almanack Investment Partners, LLC, please visit www.adviserinfo.sec.gov.

No part of this material may be duplicated in any form by any means or redistributed without Clark Gaines’s prior written consent.