Scathing Rebuke Of Bitcoin

Larry Swedroe went off on Bitcoin. His substack post reads like he's angry. There are some points I agree with and some points I do not. 

The most recent decline, Larry says, proves that Bitcoin is not an inflation hedge in a time when reported price inflation is running above target and while gold is doing so well. 

The table only goes back five years and it takes in the recent crash through yesterday. Since Bitcoin's inception it has compounded at 137% versus 9.8% for gold and 14.8% for the S&P 500 while inflation has gone up by 2.58% annualized. 

There's nugget about Berkshire Hathaway that if it fell 99% it would still have outperformed the S&P 500 since Warren Buffett took over. Applying a similar thought to the price of Bitcoin, I asked Copilot how far would it have to fall in order to have merely doubled the rate of inflation since its (Bitcoin's) inception. Copilot said Bitcoin started at a nickel and that if the price fell to ten cents, "yes ten cents," it would still have doubled the rate of inflation. Based on the testfol.io data to Bitcoin's inception, that tracks but let's assume Copilot is off by a magnitude of 1000, it could drop to $100 and still be far ahead of inflation. 

Point conceded that holding it since inception is not realistic but I believe the five year table is realistic. 

Larry says it's not a haven. I can probably get on board with that because it certainly is not reliable. In 2022, testfol.io has inflation running at 7.04% and Bitcoin up 57% that year. The next year, inflation clocked in at 6.46% while Bitcoin fell 63%. The latest decline doesn't prove anything in terms of it being an inflation hedge. A four month spell doesn't prove or disprove anything. What if four months from now Bitcoin is at $130,000? 

He's correct about the relative lack of history. Fifteen years is not nothing but pretty much is nothing compared to gold. He also talks about the touts constantly reinventing the narrative which they do, I think implying charlatanism. I don't know how you observe Michael Saylor and not conclude he's a charlatan. All of the negatives can be true but it still can protect against inflation. Is the current decline in Bitcoin much different from gold's decline starting in late 2012 when GLD fell from $170 down to $106, 39 months later?

Inflation compounded at just 78 basis points in that period while gold negatively compounded at 13%. How about the period from August 2020 to October 2023? Inflation ran at 5.61% annualized while gold negatively compounded at 2.86%.

I agree with Larry on most of his points but not the big point. For my money, Bitcoin has never been anything but asymmetric opportunity but it clearly has protected against inflation even if it never does so again and four bad months proves absolutely nothing (repeated for emphasis). 

A pivot to a very academic article from the ReturnStacked guys taking the other side from me about adding duration to a portfolio. The conclusions rely on how things should work in a manner that I am not comfortable doing. It starts out acknowledging that in the current "flat term structure" it is "tempting to see duration as uncompensated risk." We've obviously been using that phrase for quite a while. 

This is rebutted by saying "misses a crucial point: bond yields act like gravity for long-run returns" and then that idea is defined in detail. "As yields rise, they drag present returns down but simultaneously lift forward-looking expectations. In many ways, all changing yields really do is push and pull returns across time." Cool if you agree and it is academically correct but I think of that as being pretty oblivious to having money already exposed if yields continue to rise. If you buy a ten year bond yielding 4% and then prevailing rates move up to 5%, the price of the bond will drop about 9%. For a 20 year bond, it will drop about 14%. 

There was then a long discourse about the role of inflation expectations in bond pricing. Academically important but how wrong did that turn out to be from the late 2010's on? 

The paper delved into the folly of trying to predict what interest rates will do. Agreed. But back to the idea of adequate compensation for the risk taken. Believing that 4% is not adequate for ten years is not an attempt to predict interest rates. I have no idea if ten year yields will ever get to a point where the compensation is adequate but 4% is not for me. If that is adequate for you, then you should take it. 

Reading through, there is a tremendous reliance on bond markets doing what they should as I would phrase it which is not a bet I would make with my money or client money. 

I'll close this out with the paper's shift to implying that bonds are the only diversifier versus equities. They obviously don't believe that but the paper took a very binary approach, bonds or nothing to diversify. They say there is a need for different return streams which yes, we have found many to blog about and that I use for clients with volatility profiles that I think people want from bonds as well as yields (in some cases) and total returns (in other cases). 

I've been using bond substitutes for a very long time which does not make the process infallible but long term readers have seen the thought process come together and then get implemented. There's probably not much of an academic rebuttal to what ReturnStacked is arguing but I've been at the very least, grossly underweight duration for 20 years, avoiding it entirely along the way. Twenty years is a long time in relation to a normal retirement span and even a normal career span for a portfolio manager. 

Yes there are certain functions and attributes bonds should provide but I would not tunnel vision on how things are supposed to work. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Stop Fidgeting

We had a structure fire this afternoon, right after the market closed so this post will be very short. Not much drama in the picture, the fire was contained to the chimney and was knocked down very quickly.

But I do have an analogy between fire trucks and managing an investment portfolio.

The red fire truck is just over eight feet wide, accounting for the mirrors, it is between nine and half feet and ten feet wide. The door right behind it is 12 feet wide. Once you line the truck up correctly, you can back right on in very easily. 

Someone new tried to back it in the other day after our regular training and was fidgeting with steering wheel so much that they were way off center, making putting the truck away much harder than it needed to be. 

Once you line up your portfolio correctly, it will get you where you need to be. Constantly fidgeting with the holdings, trying to optimize for the thing that just happened will make participating in the market much harder than it needs to be. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

The Legend Of The One Fund Portfolio

Meb Faber's most recent podcast had a couple of interesting things to say about trend following and one thought provoking idea that we've hit on few times here too. 

"Trend is the premier diversifier" for a diversified portfolio and he talked about allocating more than what I think we usually talk about here. The Cambria Trinity Fund (TRTY) allocates 35% to trend. Not allocating enough to trend is one of the biggest mistakes investors make he said. Trend doesn't have to just be managed futures for this conversation, it can also include the momentum factor for equities. There have been a lot more managed futures funds getting listed but also more equity momentum funds too including one from Motley Fool with symbol MFMO. I mentioned MFMO because right or wrong, I associate quality and value with Motley Fool as opposed to momentum.

An interesting tidbit was the belief that "trend chops off the left tail but also gives exposure to the right tail" which I took as being more about managed futures that equity momentum. What that means is that managed futures should protect against extreme negative events (the so called left tail) while benefitting from extreme positive events, the right tail. 

Basically Meb was saying that managed futures can get you out before there is crisis and continue to hold when a market, like gold or silver until a week ago, is rocketing higher. This left tail/right tail idea can be true at times but it has also failed plenty of times. If gold peaked a week and half ago and is now going to revert to some sort of mean that would presumably be much lower from the $5600 peak then I would expect most managed futures to ride gold back down if some sort mean reversion happened quickly. Most managed futures programs have slower signals, 10 month moving average is a common one for example. I'm not trying to predict a fast decline for gold, just pointing out that if it happens, managed futures is unlikely to have gotten out. Maybe some sort of risk weighting and/or position sizing process would be a differentiator of returns across different funds though, in a large gold drawdown.  

If you lean toward Meb's belief of tiling higher to managed futures, I would suggest owning several different funds. An easy way to differentiate would be to have one fund implementing a full managed futures program and one fund that was a replicator. I plugged KMLM, DBMF and AQMIX into Grok and asked how they differentiate risk weighting and position sizing. KMLM replicates using 22 markets while DBMF replicates using 10 markets. Grok actually had a lot to say about the differences between the three so this is doable if, again, you want a large allocation to trend. 

There was a quick mention in the podcast about one fund portfolios. We've looked at this idea before so I was curious to hear Meb's thoughts but they didn't really explore it with specific funds. It is intellectually appealing to have just one fund truly be all-weather giving a real return (inflation plus X%) of more than 2% while being robust in the face of market turmoil. 

One way to think about what would be ideal is to net out a result that exceeded the inflation rate plus a 4% or so withdrawal rate. That's not really about beating the stock market or even keeping up with it. Yes, some sort of diversified equity fund like domestic ITOT or global ACWI should annualize out above the inflation plus withdrawal hurdle but equities won't be robust in the face of market turmoil. They would be market turmoil.

A few weeks ago I asked Copilot and Claude to each construct a portfolio comprised of SPMO, GLD, AQMIX, ARBIX, CEFS and SHRIX that equalweighted the funds by standard deviation and kurtosis.  I got the following result.

The backtest looked pretty good. Since then we had the panic down in gold but the results still look good YTD despite the larger decline....because of the gold directly but also in AQMIX. Make of that what you will.

I circled back to this based on the idea of a one fund portfolio. Is there one fund that might best capture the attributes of the portfolio that equalweights standard deviation and kurtosis. The portfolio is pretty robust so maybe there is a single mutual fund or ETF. 

Copilot's first answer was AQMIX. It offered some other funds too which matters in that Copilot didn't feel constrained to just the components of the portfolio. The other suggestions were client/personal holding BLNDX and AQRIX which is essentially risk parity. Based on thinking it knows me, it thought that BLNDX would be the best choice I could make. 

That's funny on several levels including that at one point I said BLNDX is probably the closest to a single fund portfolio I'd ever go. Keep in mind, Copilot might have read the post in which I said that.

Inflation compounded at 3.88% in the period studied. I threw in TRTY guessing that it would be Meb's contribution to the one fund portfolio discussion. Yes it is only six years going to BLNDX' inception but in that period, Copilot's portfolio (my names, its weightings), AQMIX, BLNDX and VBAIX all cleared the 7.88% hurdle (inflation plus a 4% withdrawal rate). 

As a single fund portfolio, BLNDX clearing the hurdle by 264 basis points compounded, with a lower volatility is impressive. 

To the other point about chopping off the left tail while maintaining the opportunity to get the right tail, a lot of images coming.

First Copilot's monthly bell curve

AQMIX

BLNDX

I'm not sure I would pound the table on chopping off the left tail but there is something to it. I think Copilot does chop off the left tail pretty well but based on the monthly distribution, it seems to also chop off the right tail which is corroborated by the volatility numbers and the standard deviation numbers which although not shown are about half that of the others. 

I feel no push to ever consider a one fund portfolio but teasing out some all weather attributes is productive. BLNDX should be all weather to some extent versus a technology fund or some other volatile equity sector fund. Understanding what various holdings should be doing and how close they are to trading inline with those expectations is pretty high on my list. 

A final point is with any sort of portfolio strategy, there will be years where whatever you are doing will lag, maybe by a lot. BLNDX lagged VBAIX by 600 basis points in 2025 and almost 1200 basis points in 2023. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Deconstructing Autocallables

Earlier this week, I spent some time trying to dig in more to autocallable ETFs with the help of Copilot. The basic idea is that autocallables have been around for a while as structured notes, an investment product, that tend to have high yields and last year, they started to become available via the ETF wrapper thus democratizing the product. 

We've looked a few times at the Calamos US Equity Autocallable Income ETF (CAIE). The very basic idea is that it pays 14% annually (it's a monthly pay) so long as the reference index does not decline 40%. If the decline is that big then payments are suspended until the underlying index recovers back above point where it breached 40% down. I remember from the presentation when CAIE first listed that there was only one instance where the index went down such that payments would have been suspended. 

CAIE owns 52 autocallables with one coming due and getting replaced in the fund every week which can reduce volatility some. 

It's not even a year yet but you can decide for yourself what you think about it. My hang up has been that I don't think I really understand the risk here. A 14% yield in a 4% world has risk. It's not that no one should take the risk but I don't believe in taking risks that I don't understand. I may have made progress with Copilot. It was kind of a long back and forth but it was productive and hopefully I can convey what I think I've learned. 

I'll include tables from Copilot but the TLDR is that although they continue to pay out as long as there is not a 40% decline, the price will be sensitive to price swings in the reference index which is a derivative of the S&P 500. 

This next one makes them seem very complex.

The prompt for me to do this was that GraniteShares launched autocallable ETFs for two stocks, one tracking Tesla with symbol TLV and the other tracking Nvidia with symbol ANV. I made the obvious observation awhile ago that this sort of thing would be coming and that it is something we should try to learn about. 

Copilot said the "structural mechanics" of TLV and ANV were the same as CAIE other than using individual names for the reference securities. It said the yield on TLV and ANV wouldn't be higher than CAIE. I pushed back on that because by definition there is more risk in a stock than an index so the compensation for the autocallable tracking stocks should more. 

First it agreed that you'd expect higher yields but...

What it really meant was that the yield will be a little higher with TLA and ANV but not enough to compensate for the volatility and risk of the underlyings.

Copilot thinks that TLA and ANV will "carry 2-4x the risk of CAIE but only offer 1.2x the yield of CAIE."

Hoo boy. So I asked if the GraniteShares concept would make more sense with less volatile names like maybe Microsoft and Alphabet. 

Using lower‑volatility stocks like Microsoft or Alphabet would make the GraniteShares autocallable concept materially better — but not for the reason most people assume.
It’s not just “lower vol = safer.”
It’s that autocallables behave non‑linearly with volatility, and MSFT/GOOGL sit in the sweet spot where the structure actually works as intended.

That's really quite an indictment of TLA and ANV. It goes on to say "bad tradeoff" describing TLA and ANV. Using MSFT and GOOG has volatility characteristics that would make the autocallable behave more like it's supposed to behave, it said. 

Alright, I guess Copilot is not a fan. We're going with the idea that Copilot is correct.

While I still am not so intrigued that I want to step into CAIE, knowing there is downside sensitivity helps me understand a little better. I am not saying Calamos said there would be no downside but I don't recall it being discussed.

The reality is that CAIE will "work" the vast majority of time but not feeling like you fully understand what can go wrong makes it a difficult hold even if we understand a little more than we did before. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Looking Around Corners

This morning's email from Bespoke led off with the following quote from author William S. Burroughs.

“The best way to keep something bad from happening is to see it ahead of time... and you can't see it if you refuse to face the possibility.”

It ties in with a lot of what we talk about here not just for portfolio management but also lifestyle. 

First, portfolio management. I talked about "looking around the corner" for trouble or problems. A simple example is that with tech's weighting in the S&P 500 being so high at 45% (that's actually tech 34%, communications 11%), realizing that history has not been kind to sectors that grow larger than 30% of the index, being underweight tech and/or communications however you think about those two is a way to minimize the impact of something bad happening to the index. 

I'm not saying no tech exposure, that doesn't make sense, but if the software stock panic of this week turns out to be a canary in the tech coal mine, then being underweight should probably spare the portfolio some number of basis points of the full decline of the broad market if that's what happens. 

Try to look around a corner accounts for our perpetual exploration of how to use liquid alternatives to try to smooth out the ride which takes us to a webcast put on by WisdomTree with Shana Sissel from Banrion as the guest. Shana is working with WisdomTree to build model portfolios that rely heavily on alts as well as capital efficiency (leverage) using WisdomTree's core efficient funds like NTSX which leverages up such that a 67% allocation to that fund equals 100% allocated to a 60/40 balanced fund like VBAIX from Vanguard. Brad Krom from WisdomTree who was also on the webcast said that if the leftover 33% can go into something that earns more than T-bills, that you'd be adding alpha versus VBAIX which is a point we've looked at here before. 

The Banrion/WisdomTree portfolio is available at the WisdomTree website if you register. It's probably not ok to share all the names and percentages but we can keep it high level. It allocates 42% to "allocation" which includes NTSX and another core efficient (leveraged) fund, 17% to alts including client/personal holding BTAL, long/short (Shana is big on long/short), crypto, managed futures, a little bit to emerging markets, 10% to simpler fixed income beyond the fixed income exposure in the core efficient funds and the rest in simpler equities but included in that equity sleeve is a little gold from GDE. 

The backtest is short because some of the funds are pretty new but that's ok, Shana didn't start working with WisdomTree since last August or September (I think, apologies if it was more recent than that). Also, the portfolio is not static. She talked about dialing up or dialing down exposures but there was no indication of how frequently she does that.

Here's how I replicated it, it's about half the funds but it admittedly is a loose replication. For one thing, she included long biased long/short but I did not.

Everything there except AQMIX and SHRIX are in my ownership universe.

I wouldn't take too much from the raw performance for being such a short time frame but I think you can get a sense of the volatility added by the crypto and gold as both have gone down a lot in the last few days. 

The gold exposure is nowhere close to the 20-25% that some pundits argue for, it is much closer to the low-single digit starting point I use. It's not like she has a ton in crypto but it's not nothing and I am not a fan of Bitcoin or the others as a diversifier, to me it is all about asymmetric opportunity. Based on how volatile it used to be (the current event maybe approaches that?) and then the compressed volatility of the last few years, I don't believe it can be modeled in as a diversifier. 

Shana said something that is almost word for word what I have said here. She said that BTAL and managed futures are the two most important holdings because of the diversification they provide. I'm not claiming she got that from me, I am saying it is two different people drawing what I think is an obvious conclusion. BTAL and managed futures are the two most important diversifiers. Of course the 77% of the time that markets are going up makes them tough to hold but, also echoing our conversation, since there is no way to know when BTAL and managed futures will go up, you need to size it correctly and hold on. In this current event, BTAL seems to be working the best. The alts that should be going sideways are doing that which is good but gold obviously is part of whatever is going on and managed futures is very long gold and silver so it is getting hit too.

She has a little more BTAL than me and a little less managed futures. 

Back to the quote at the top of the post as relates to lifestyle. We learn as children that it is important to exercise and not eat too much sugar. That advice is more important than we realized when we first heard it. Just as owning 40% in tech is teeing up for an adverse outcome, so too is no exercise and a sugary diet teeing up sickness. Getting exercise and diet in order is a very simple way to keep something bad physically from happening. Really it is about improving your odds of successful health outcomes. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Just Take A Breath

It's not getting a lot of attention but Bitcoin has taken quite a hit over the last few months. 

I threw Strategy (MSTR) on the chart too which is of course a leveraged proxy for Bitcoin. Over the weekend I saw that Jim Cramer was Tweeting about Bitcoin and that Michael Saylor should do something and then I saw this get retweeted during the day on Wednesday.

If you look at his feed, there are a lot posts about Bitcoin and several about Strategy. Gemini gave this answer,

It's difficult to know whether the emotion in the tweet really captures Jim's sentiment or if this is his TV persona expressing itself. If the tweet doesn't capture Jim's actual state of mind, there are HODLers who are as worried as how I take his Tweets. There are other people sitting on relatively large positions of the software stocks that got hit yesterday or broader tech that is getting hit today.

We spend a lot of time here talking about position sizing, having the right mix of assets and managing sequence of return risk if relevant. 

However difficult the task of enduring through stock market cycles and various events that come along, it will be orders of magnitude more difficult when every event whips up your emotion. 

Bitcoin is, was and always will be a speculative asset with a legitimately asymmetric return opportunity. It could go to the moon or it could crap out. Anyone who is sweating their Bitcoin position has too much. Their dread is then magnified when they read Tweets like Jim's or see new price targets to the downside from the extrapolators.

If you think Bitcoin is a scam, then the huge decline doesn't sway you the other way. True believers still truly believe and skeptics willing to bet on the asymmetry may have had their confidence shaken but in reality, the only thing that has changed is the price. Anyone whose position is stressing them out, ok sell some, maybe it will be a good decision or maybe it will be a bad decision, no idea, that is what it means to bet on asymmetry. I'm using the word bet on purpose. I would grain of salt the idea that it is truly an investment...for the most part. A diversified portfolio might allocate to, "invest" in, asymmetry so with sort of top down framing, maybe it is an investment. But from the bottom up, it's a bet.

Qualcom (QCOM) is getting hit after hours on its earnings report. The stock has been meandering for the last five years not making much progress and YTD it is down 13%. It earned $2.78 for the quarter reported versus $2.83 for the same quarter last year and it appears they are vulnerable to the shortage in memory chips.

The average analyst estimate for QCOM's 2026 earnings is $11.96/share and for 2027 the estimate is $12.25/share. I have no disclosures to make here but before the afterhours hit, it was trading at 12 times earnings and it's revenue is $45 billion. While I have no idea what the stock price will do, it is quite clear the company isn't going out of business anytime soon.. 

This isn't about Qualcom. If you own individual stocks, you own them for some reason, there was something that caused you to buy. A simple drop in price, especially when the sector that the stock is in is going through something, like parts of tech now, or when the entire stock market is going through something, probably has nothing to do with whatever your reasoning was for buying the stock so don't get worked up. Succumbing to emotion on a regular basis makes for a stressful existence and will hamper returns significantly. 

Just take a breath. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.

Leverage & Derivative Income? Go On, I'm Listening

NEOS is launching three ETFs that offer 1.5X covered call exposure of their call funds. So their covered call ETF SPYI references the S&P 500 and now the new Boosted S&P 500 High Income ETF (XSPI) will seek 1.5x the movement and yield of SPYI. For the QQQ they have had QQQI and now XQQI and Bitcoin BTCI with XBCI as the 1.5X companion.  

The specific verbiage is the new funds will have 150% of the notional exposure trying to pursue higher levels of tax efficient monthly income and enhanced market participation. That leaves some wiggle room if 1.5X is not precisely linear. 

The website for BTCI says it "yields" 27% so the math checks out on the performance dispersion between total return and price only. The price only versions of BTCI and 1.5 BTCI did go up through August of last year as IBIT lifted so with the right path it is possible. 

SPYI and 1.5X SPYI has done a decent job of trading sideways while paying out 12% for SPYI. Trading sideways for a high yielder is a good outcome for these. The crazy high yielders generally are not capable of that. Of course, the next time the S&P 500 drops 20 or 25% covered call funds should be expected to have a pretty high downside capture. The yield might help a little but not a lot. 

It's not a good assumption that the new 1.5X funds will deliver 1.5 times anything. The S&P 500 version should have a better chance because it should be less volatile than the Bitcoin funds.

Short post tonight, had to help go get Walker Fire's new brush truck. One of our guys had the idea of transferring the fire apparatus from our old, 2006 Ford onto a newer chassis. This probably saved the department $150,000 versus buying a whole new brush truck.

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.