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.

A Leveraged Fund Actually Did Better?

Just a couple of very quick snippets tonight.

Netflix (NFLX) has taken quite a hit over the last seven months or so with the attempt to buy Warner Brothers probably a contributing factor.

NFLY is the crazy high yielding version of Netflix, it is down a little more on a price basis but when you add the yield back in, it has actually outperformed by 800 basis points (per Testfol.io). NFXL is a 2X version of Netflix and the way the sequence of daily returns played out, it helped NFXL to be down less than 36% times two. The 2X funds and the derivative income funds are not automatically bad holds but they certainly would be tricky holds. Both have sort of worked out during this period but flip of the coin, they could have gone the other way. 

Man Financial came out with an ETF in December that goes 100% S&P 500/100% managed futures in a manner similar to the ReturnStacked fund with symbol RSST.

MATE is the new Man Financial ETF, Portfolio 2 is building MATE yourself with client/personal holding AHLT as the managed futures piece and Portfolio 4 is an AQR fund that does something similar but is not 100/100 and that one is a personal holding. 

RSST pretty much never comes out ahead in any sort of study we do. If we take MATE out and go back to RSST's inception, RSST outperformed IVV/AHLT for the first half of the back test but overall lagged by 488 basis points compounded.

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.

Insanity And Stability All In One Blog Post

Yesterday, I said I wanted to give the insanity spilling out over the weekend time to "breathe" and then things got more insane. Peter Attia of all people is apparently all over the Epstein files. Kevin Warsh is in there quite a bit, Eddy Elfenbein theorized that his nomination will be rescinded. Now I need time to breathe, I cannot wrap my head around any of this. Even Casey Wasserman is in there. Who? He's in charge of the LA Olympic Organizing Committee and he has apologized for exchanging emails with Ghislane Maxwell. 

Moving on with a quote from Russell Napier, "chasing yield is dangerous most times, but exceptionally dangerous below 2%." While I agree with the sentiment, the sample size is pretty small with the years leading into late 2021 being the only one I can recall lasting any real amount of time. A little more broadly, chasing yield regardless of the nominal levels can be dangerous. 

In wildland firefighting there is a list of what are called watch out situations. For example, fighting a fire in the dark, in a place where you've never been is something to watch out for increased risk. That doesn't mean, you don't do it, it means you do so carefully, there are way to mitigate that risk. 

Similarly, the risks of accessing yields above the prevailing risk free rate can be mitigated. One is to diversify exposures to avoid loading up on the same risk. If you own a catastrophe bond fund and a high yield fund, the risks are diversified. Of course, there could be a terrible hurricane during a credit crisis, the risks are totally unrelated. Another way to mitigate risk is to avoid risks you don't understand. No one will understand everything well enough to invest (me with autocallables), just avoid the ones you don't understand. A third one I'll add is to think long and hard before buying a derivative income fund that "yields" 80%. 

We've built much of our thesis on how to replace traditional fixed income by using liquid alternatives in a manner that spreads the risk out so that if something blows up in some sort of unpredictable manner, the portfolio impact would be very small. If you have 10% of your stability sleeve (stability, not fixed income as a nod to TPA) in merger arbitrage that might be 4% of the overall portfolio. If merger arb cuts in half, that would be awful but the impact on the portfolio would be minimal. Compare that to 40% in AGG when it drops 13% as it did in 2022. On a price basis, AGG is down 15% from its 2021 high. The only way it makes that back is if interest rates plummet. 

Barron's had warning article about alternatives that I think excludes a huge part of the use case. The context seems to focus on trying to add alpha with things like private equity. That is a much more difficult effect to try to pull off versus a lot of plain vanilla equity for growth and using alts that seek stability and in the case of the ones we look at here, succeed at delivering stability. 

AQR is out with its capital market return assumptions as follows.

The numbers are after inflation so if inflation is running at 2.8%, they'd expect 60/40 to return 6.2% (2.8 plus 3.4) in nominal terms. The 3.4% number is lower than what they say is normally a 5.0% real return for 60/40. Playing around with different time frames on testfol.io I get higher numbers than that, more like in the high sixes. Looking at the asset classes, the expectation for US equities is lower than the historical norm but the fixed income expectations seem pretty good for those income market sectors. A 2% real return for treasuries is considered good. Or at least it use to be.

That rule of thumb is built largely on the 40 year decline in yields which is now over. Buying a ten year note and holding it for a 2.4% real return is fine, not so with treasury ETFs, but that could prove out to be a very volatile ride. Is a 2.4% real return adequate compensation for the potential volatility? For me, the answer is no. With a little more engagement, management and diversification I think the real return can be nudged up and the potential volatility reduced significantly. This is the difference between 40% in bonds versus 40% in stability. 

All of the talking points we've hit on in this post are why I continually try to find new ways to improve the stability sleeve which brings us to a fund coming this week, the VistaShares BitBonds 5 Year Enhanced Weekly Option Income ETF which will have symbol BTYB. The fund will have 80% in five year treasury notes and 20% in a synthetic covered call (short put, long call, short call) position in Bitcoin with the objective of trying to get twice the yield of the five year note. 

The idea is to blend a smaller slice to higher "yielding," higher volatility with very plain vanilla exposure. I don't know, maybe an 80/20 split addresses the bleed that goes with Bitcoin derivative income funds.

I believe YBTC is the first Bitcoin covered call fund. The 80/20 mix still has plenty of downside volatility relative to fixed income products. The 90/10 mix is a little more interesting but it's more of a yield enhancement (I realize that is the name of the fund) as opposed to doubling the yield. This doesn't make a great first impression but I'll probably follow it. The path to figuring this space out has been rough. Where I believe client/personal holding PPFIX has figured it out, there will be other funds/strategies that also figure it out.

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.

A Complicated Benefit Of Working In Your 60's

This is shaping up to be an insane weekend coming after Friday's fallout, the chatter being driven by the release of more (all the remaining?) Epstein files and Bitcoin is cascading lower flirting with Strategy's (MSTR) break even price as I write this on Saturday afternoon. I'll give all of that another day to "breathe" so that we can look at some HSA/Medicare/Social Security retirement stuff.

Barron's kicked it off with Healthcare Inflation Can Be A Runaway Train In Retirement. They pegged CPI running at 2.8% and that official numbers for healthcare expenses are inflating at 3.5%. To Barron's credit they called BS on 3.5% in the next sentence. I have no idea what the inflation rate is for actual medical services but there are countless anecdotes and news stories about people being forced to pay much more for health insurance. 

A few weeks ago we looked at a scenario where Healthcare.gov subsidies stopped at $84,000 of family income being the difference between paying almost nothing and jumping up to twenty something thousand/yr. Maybe there are enough alternatives out there, I don't know but where is a family making $90,000-$100,000 supposed to get $20,000 for health insurance this year after paying nothing last year? 

The criticism that a well structured healthcare system shouldn't need subsidies like the ones that just expired (is it too late to reinstate them for 2026?). That's true but the answer isn't just ending them, leaving people stuck.

A little further down in the article, they cited 5.8% as being the average annual increase of healthcare costs throughout retirement according to a report coming soon. I'm not sure I believe the 5.8% number either. Actually, I am sure. I don't believe that number. 

The Barron's article then drifted into income levels where IRMAA kicks in which as we looked at last week is $109,000 for single filers and $218,000 for married filing jointly. Up to $274,000 IRMAA is an additional $81 per person per month for Medicare Part B. Up to $342,000 of income and Part B is a total of $405 per person per month. 

Of course health savings account entered the discussion. Starting quite a few years ago, having an HSA eligible plan rarely has made sense for us being self employed. Our insurance guy said something about certain things have to be covered that insurance companies don't want to cover so they make the plans more expensive. Awful if accurate but either way we've only had an HSA eligible plan in the 2020's. We were very diligent putting money in every year when they did make sense for us without needing to take any out.

I asked Copilot what the median HSA balance is for families making at least $150,000. I got an absurdly low number so I pushed back a little bit and it came up with $19,000 plus or minus a couple of thousand. If that number is correct, then it wouldn't be enough to pay for something expensive that insurance won't cover but there are expenses where it could cover including paying for Medicare. 

It's a little tricky. Part B premiums are deducted from our Social Security payment. But it is valid to reimburse yourself that expense out of your HSA. The reimbursement can go to your bank account to be spent however you like including Part G Medicare. Technically, you can't use HSA money to pay for Part G but once the reimbursement hits your account you can spend it as you wish. This was per Copilot and corroborated by Grok.

The table from Copilot shows what it believes are averages for Part G per person.

Copilot thinks Part G is inflating by as much as 8-15% per year.

We'll all have Part B to contend with. How likely are you to be subject to IRMAA? Copilot estimates that 7% of people on Medicare pay the IRMAA surcharge. Depending on how long I work, there's a chance we'll have to pay it. I don't know the odds but between various streams of income, it seems plausible. We are all entitled to our own opinions but an extra $160/mo will not be at the top of my list of things to be worried about. 

Somewhat more concerning is the visibility for Medicare to eat up an ever bigger piece of Social Security checks.

That leads us to another article from Barron's (used a gift link for this one) that was not easy to understand, I may not understand it but it got into the minutia of how Social Security is calculated and what seems like a reward for working beyond 60 at your maximum income level. 

Starting at age 60, the calculation stops adjusting wages for inflation which apparently can be a positive. The key is that you're making the most you've ever made in your 60's. The example Copilot gave was someone making $150,000/yr in their 60's would benefit if their $50,000 income at age 30 was only adjusted for inflation up to $120,000. In this simplified example, $150,000 at age 62 would replace inflation adjusted $120,000 from age 30. 

Our Social Security payments are based on our highest 35 years of earnings so however many years you work in your 60's at your highest income level are replacing your lowest earnings years from when you were a kid. 

When I first read the article, I thought it was saying that your whole year by year scale moves up but Copilot said not exactly but that your "primary insurance amount" PIA is moving up. I'm not entirely sure what the difference is. If you log in to your SS online account you can see your year by year earnings record adjusted for inflation. For example, I worked at Charles Schwab for a year before going to college, I made $11,000 or $12,000 from July to July but when I last looked a few years ago, that $11 or $12 had been inflation adjusted up into the high $20,000's combined if I recall correctly. At this point, whatever the correct inflation adjusted number was from 1984/85 has since been replaced in my calculation.

If I continue to work as I plan on doing then I would be able to replace most of the years from ages 23-33 which were my lowest post-college earnings years. 

A logical question is what if SS gets cut in 7-9 years? If you're going to get $4000/mo but that gets cut to $3000/mo, then working through your 60's as described above can be thought of reducing your $1000 haircut by a few hundred dollars. If that's not worth it to you then by all means, don't do it. 

A couple of final administrative points to make. Copilot couldn't read a gift link, I had to past the text in to get help with it which surprised me. I couldn't work it in easily above but I'll include my standard lift weights/cut carbs recommendation as a way to keep healthcare costs down. 

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.

"Braking News," Gold & Silver Markets Are Broken

The title of this post is a nod to a satirical account on Twitter I follow who always Tweets about braking news. While I think the title is amusing (to me if no one else), the markets for gold and silver have broken. It's not like the metals are going to disappear but this sort of panic down is a broken market. 

The broken market will repair itself and normalize tomorrow, or next week or some other time but this is the sort of event where people panic. Gold panicked higher Wednesday night and then panicked lower shortly after the stock market opened on Thursday. Silver has been on a similar journey and Bitcoin also seems to going along for part of the ride. 

All the hype over the last few days or weeks about the debasement trade lifting gold and silver, even if not Bitcoin, and then...

Thursday was a big decline and then Friday literally broke records for the size of the declines. 

Long time readers might recall what a bad idea I think enormous allocations to things like gold are and this event is exactly why. Where gold and silver are concerned this week, risk happened fast as Mark Yusko might say.

I have zero concern about gold and silver (and whatever else) sorting themselves out, crude oil was negative $50 after all, but who panic bought Wednesday and then panic sold at a big loss with far too big of a trade in relation to their account size? Realizing, there is no way to know when this ends, this has been a behavioral festival. 

I mentioned last year that I started subadvising for a couple of other advisors (they outsource portfolio management to me). One of the advisor's client base came with a larger position in GLD than I would probably want but I took no action because the market had been orderly as it was moving higher. With the disorderly, parabolic move lately, a portion of his accounts were now at more than 10% in gold which I think is too much. I built out a trade Wednesday night to execute Thursday morning to take that portion of his client base down to 7% in GLD.

The share quantity is fuzzed out. I executed the trade a minute or three into the trading day. There have been a couple of other times over the years where there has been some sort of similar panic where it made sense to go the other way. I told the advisor, don't focus on the result because it was lucky, focus on the process. Selling into upside hysteria is going to be the right trade more often than not, regardless of what happens next. 

My clients started at 2-3% of just their equity allocation in gold last February so they were up to 4-6% or so which is not a position sizes that concerns me even with the overlap in materials stocks and managed futures. I actually reduced materials by about 20% a couple of weeks ago so sized correctly, this event is in the realm of normal volatility. This is about a process that I think is repeatable. 

Personally, I bought a few shares of the iShares Silver ETF at about $82 on the way down to $70 before closing at $75. The trade amounts to catching a falling knife so I didn't step in for clients, it doesn't seem like a good fit that way but it is the same trade as selling upside hysteria, I bought a little bit of downside hysteria. Maybe silver will go to $50 and live there for a while or maybe it will go back to $90 or $100 quickly and then mellow out but it is down 30% in a couple of days and even if the result ends up being terrible, buying something that cannot go to zero after a 30% whoosh will work out more often than not. 

There's no huge barrier to entry here for the psychology. I think most people can train themselves to trade against panic, regardless of the direction, in something they understand. I certainly wouldn't buy a lottery ticket biotech that I'd never heard of before cutting in half on an adverse FDA ruling for example. 

Even if you are not buying this panic down, again it might turn out to be a terrible trade, if you can avoid panicking, that is far more important. Sized correctly, there is no reason to sell gold or silver into this decline. 

AGQ is 2x levered silver. Oof.

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.

Accessing & Harnessing Sophisticated Strategies

The excitement over providing retail access to private equity seems to have turned with more skepticism. Cliff Asness introduced the term volatility laundering which no doubt raised awareness of the drawbacks. Check out Jeff Ptak on Twitter for what I would call investigative finance journalism trying to dissect how the XOVR ETF is carrying its position in SpaceX. 

As aforementioned excitement built, we talked frequently about not getting wrapped up with illiquid vehicles offering private equity. I have been skeptical about the need for any of it in a typical retail-sized account. My thought has been that if you think you need to have some sort of private equity in your account, it would make more sense to own one of the companies generating the fees, which tend to be high, instead of paying the fees. 

We've talked most frequently about Blackstone (BX) in this context. I should be clear that I've never owned Blackstone for clients, I've never even considered it, I am saying for anyone who thinks they should have private equity, a company like BX probably captures the effect for better or for worse. 

From it's inception into year end 2024 BX compounded at about 15% versus 10% for the S&P 500 but the drawdowns are typically much larger than the index. Here's the last year plus. It did much worse last April and maybe the negatively biased lingering has been because of the increased skepticism I mentioned above, or not but either way, as a proxy for private equity, when times are good, they are great and when times are bad, it's a very rough hold. In 2022, BX was down 39% versus 18% for the S&P 500. 

From the top down, I think it makes more sense to add long volatility from the tech and discretionary sectors. Extremely volatile financials seem prone to blowing up entirely in ways that no one saw coming due, I believe, to the extreme complexity of the business models. 

Now to trying to harness short volatility. 

I have no interest in any of those funds but it is interesting that they talk about harnessing volatility in their marketing. Most clients own Princeton Premier Income (PPFIX) which sells index puts in such a way that the fund is an absolute return vehicle with very little volatility. 

YSPY sells put spreads on SPXL so a little different underlying but they both sell puts in very different ways. PPFIX is like a T-bill with a slightly higher return as you can see. 

Most of the derivative income funds that have launched in the last couple of years have been crazy high yielders like YSPY whose website says it "yields" 48%. I've been saying there will be more of these and that the niche will evolve. Here's a filing for Worth Charting Options Income ETF (WRTH) that will sell straddles on individual stocks. It's not clear to me whether it will be a crazy high yielder or not. 

Crazy high yielders don't really make sense to me. There is no way the NAV of a fund will keep up with a 48% distribution rate. YSPY pays weekly and on many of the payouts, 90 plus percent of them are returns of capital (ROC). ROC has favorable tax status and using it to round off a distribution, sure why not but often the crazy high yielders pay mostly ROC. Why not just have a lower distribution?

We've outlined using an extreme drawdown strategy where the question is what will deplete faster, just taking uninvested money out of an account until it's gone or a fund like YSPY eroding very quickly paying out an obviously unsustainable distribution? The answer is path dependent so there's no way to know going forward.

I've very pleased with PPFIX, an improvement in my eyes would be something that yielded 7-8% and managed to trade horizontally after the distribution. My hunch is that WRTH is not seeking such a plain vanilla outcome. The path to that result is probably with an option combo involving put options more than call option. 

PPFIX sells puts so far out of the money that the occasional dips you see on the chart are actually because of the process they have to adhere to of marking to market. Often the one day dips get reversed within a day or two, they haven't run into trouble with the puts they sell. A little closer to the money would still be very far out of the money and might nudge the return up. PPFIX doesn't want to do that but someone else might or someone else might create the effect I'm talking about with a different strategy. 

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.

Duration Is Just Another Alt

In promoting his latest podcast with Michael Batnick, Ben Carlson listed talking points including "diversification is working again." When I clicked through I didn't see where in the convo they got to this talking point and I wasn't able to listen to it. On the other side of the trade, Walter Bloomberg Tweeted out a quote from Blackrock that "bonds no longer offer reliable protection" for when stocks decline. 

Both things are true. Actually, the implication that diversification wasn't working was never correct, it was more like the manner in which we diversify has changed because "'bonds no longer offer reliable protection' for when stocks decline."

The conclusion coming is not that I want to own duration here, I do not, full stop. But I had a thought. If there is some sort of biggish correction this year (or worse), there is nothing preventing duration from offering protection. It's not reliable is Blackrock's point. My point is that the compensation is inadequate for the risk taken and that it's not reliable.

In this way, duration might be like managed futures. Last April, managed generally provided no protection when stocks dropped. Managed futures absolutely has the tendency to go up during market declines but the weakness is when things turn very quickly. Even fast signals won't be quick enough to react to a very quick turn around. 

I talk about small exposures to several different alts with different risk factors. Duration certainly could be thought of as having different risk factors from the other things we talk about like arbitrage, various versions long/short and so on. I don't think too many people think of duration as being an alt but for correct sizing in a portfolio, maybe it should be. 

The way we apply alts in a traditional 60/40 construct where maybe there are 5% allocations to eight different diversifiers, why couldn't one of them be duration? Maybe it will work on the next serious decline? If not, it may not be different than any other alt not "working" on the next decline.

Last April BTAL worked, merger arbitrage worked, managed futures did not and neither did duration but next time maybe the opposite will be true, sort of repeated from above.

In this light, if you wouldn't put 40% into any of the alts we talk about (I wouldn't) then you wouldn't put 40% into duration. I wouldn't put 20% into any of the alts we talk about and certainly not duration. If we're talking about 5-6%, it's just another alt, the consequence for being wrong is pretty small.

If we pivot to TPA and allocating between growth and stability, I think the argument for duration being included as stability is pretty weak and I don't think it has anywhere near the opportunity for growth or asymmetry as anything you might think to put in that bucket so I don't know how it fits in to TPA but I will give it some thought. 

But to be crystal clear, in terms of adding duration to the portfolio 

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.

This One Will Piss Some People Off

Bloomberg wrote about what looks like the unraveling of the Yale Model which of course the illiquid alt focused strategy that David Swensen is credited with deriving starting in the 1980's. As Bloomberg tells it, the beneficial effect of private equity and venture investing has deteriorated. We've looked at the Yale endowment countless times. It's interesting for learning about what alts can do but then it is also a useful lesson about having too much in alts, the extent to which illiquidity is unnecessary for retail sized accounts and the problems that arise from having too much complexity in your account.

A lot of simplicity hedged with a little complexity. 

Speaking of complexity, Jeff Ptak had a good writeup about what sort of complex (my word) funds are worth paying up for and which ones are not worth it. Although not that complex, he thinks target date funds are worth it for an interesting reason. 

Morningstar writes frequently about the gap between the returns for funds versus the return investors of those funds get which is less due to various behavioral mistakes. We talk every so often about ergodicity (long term, the market is going to go up with you or without you so you might as well go along for the ride). Target date funds rebalance for you (glide path) so there are fewer reasons to sell so you better capture the long term result says Ptak. To the extent the concept of a gap strikes a cord, holding on for a long time is obviously how the gap is overcome. 

Look at something like Amazon or anything else that is up a bazillion percent over the long term. As we talked about recently, there have been some hideous declines along the way but throughout those hideous declines people didn't stop ordering stuff or lately watching the streaming service. The next time the S&P 500 drops by 25% and Amazon cuts in half, we still will be buying stuff and watching the streaming service. Yes I am aware that AWS accounts for 20% of revenue and 60% of earnings. Chances are the AWS numbers will grow faster than the rest of the company. That all sounds great but the next time the S&P drops by 25%, I would expect Amazon to cut in half. Last April, Amazon fell 30% versus 18 or 19% for the S&P. 

Holding on isn't easy but sitting here, close to all time highs, you know it's the right thing to do. It will be the right thing in the middle of the next panic too. Usually. Owning individual stocks requires being able to discern when something has changed in such way that the company won't recover from. However infrequently stocks need to sold, funds even less so. The point of all of Ptak's articles about the gap is do less. Do less.

Alpha Architect cited a study about new retirees trading more as a result of having more time on their hands. Turns out that doesn't go very well. Do less. 

Here's another good example about thinking short term with a high likelihood of ending badly from Bloomberg. Investors, Bloomberg says, see an opportunity in long term treasuries because the yields are toward the upper end of where they've been in quite a while. Ok, but yields are below 5%. Do you think you have an edge figuring where rates are headed? I certainly do not. Assessing that the compensation isn't worth the risk (that describes my view) is not the same thing as making a prediction about where rates are headed. 

Here's a fun one to close out with. The optimal exposure for Bitcoin in terms of weaving into a portfolio to improve the Sharpe Ratio is......a negative exposure. That is the conclusion of Alistair Milne. You can decide for yourself but in terms of trying to model it in, much of its track record is not repeatable. In 2013 it was up 5400%. That's not going to happen again. In 2017 it was up 1400%. That's not going to happen again. In 2020 it was up 308%. A repeat of that would surprise me but maybe that's possible but it is also possible that turns out to be essentially worthless too. 

I've owned for a long time because of the asymmetric potential. I am not a true believer. Before the link today about negative exposure, I've made the point about backtesting it too far as being worthless because of the unrepeatable performances. I won't say don't own it but I see a lot of content from the fund providers about all of these RIA looking to make allocations and do some modeling. It's all worthless. It might go into the millions or it might crap out but there is no modeling it. 

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.