Trust, but Verify

While the phrase “Trust, but verify” has Russian origins, it was made famous in the US by Ronald Reagan (ironically as he negotiated nuclear disarmament with the USSR).

In 2024, the phrase takes on a new meaning. Why?

Americans are losing faith in the Fed and our Government.

We were told a soft landing is coming. We were told that a barrage of rate cuts in 2024 was a given. We were told that inflation is dead.

I don’t know about you, but nearly everyone I speak to in this country is financially exhausted from the elevated cost of seemingly everything. And while the American consumer slowly depletes its savings (despite high wages), investors are now starting to ask questions.

Remember the March jobs report? We were told the economy is on fire and were presented a blowout jobs number. But after about 5 minutes of research, it became evident that all the job growth came mostly from people taking on multiple part-time jobs as well as further job creation in the public sector.

Apparently though, 1 in 5 people in America still trusts our government. That’s convenient, as 1 in 5 people are also employed by our government.

While my goal is not to suggest our government is the enemy of the people, it is to suggest that not all of the data we’re getting should be taken at face value.

Another longstanding belief is that when real yields (that’s the interest you earn on a bond AFTER inflation) are high, gold suffers, and when real yields are declining or negative, gold does well. However today, we are seeing real yields high AND gold going almost parabolic.

This type of divergence is a telling sign. It’s suggesting that gold buyers (sovereigns, institutions, yadda yadda) don’t believe what the Fed is telling us and that in reality, major monetary debasement (more printing) is on the horizon. These charts harken back to the era of the 1970’s where we dealt with both high inflation and high interest rates.

These dynamics further introduce the risk of stagflation, which is a period where economic growth hobbles along while high inflation remains sticky like velcro.

What does this mean for portfolios? Well historically, a stagflation period is very challenging for the traditional 60/40 allocation and has instead benefitted investors more exposed to areas like commodities & real assets.

As “All Weather” style macro investors, these are the types of environments that asset managers like us get excited about. We’ll be watching closely to see how the Fed navigates between an “unsustainable” fiscal path, or another round of printing.

Either way, we’ll be verifying the heck out of these guys.

Finally, here is what’s on my radar:

real estate

Remember when 7% mortgage rates were projected to crush home values? Turns out the adage that “real estate is local” still holds water, as does the supply / demand imbalance. The fine folks at ResiClub put out this map that uses Zillow data to project forward-looking 12 month performance in housing markets around the country. There’s still a lot of strength out there it seems.

macro

We talked about the demand for gold in my opening section (aka rant) across the sovereign & institutional class but apparently retail has an insatiable desire for the yellow rock as well. Costco is selling north of $2billion annually in gold bars.

bitcoin

If you’re still getting up to speed on the digital asset, you’ll start hearing a lot about the upcoming “Bitcoin Halving”. What is that exactly?

Well, perhaps the most desirable attribute to Bitcoin is its finite supply of 21million (which can be divided into tiny fractions). Currently there are roughly 19million bitcoin in circulation. The remaining 2million will be released into circulation over time, and the halving represents a pre-programmed reduction in the rate of new supply as we work our way towards 21,000,000 bitcoin.

The halving occurs about once every four years and while the first 3 halvings have preceded a bull run in the digital asset, I’m very interested to see how this one behaves given all of the new macro & structural dynamics that exist around bitcoin today that didn’t in previous events..

As always, thank you for reading!

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

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