The other day I said I'd try to put something together that might work if Citrini Research's prediction possible outcome stemming from AI plays out. As a reminder here's what they spelled out for two years from now.
- Unemployment rate hits 10%
- 30% decline in the S&P 500
- Home prices fall at least 10% in some big markets including NYC, LA and Chicago
- Labor income drops below 50% of GDP
- CPI goes negative
I came up with this;
Instead if QLEIX which is leveraged up here, I plan to monitor this idea using 15% in HFEQ which is long biased L/S that targets 2x volatility. I used JEPI but I would swap out that equity beta for BTYB that we looked at on Sunday. Since that fund is only a month old, it makes no sense to back test it yet. NFLY is a crazy high yielder yes but it avoids crazy CEO risk like a couple of the crazy high yielders have and I think would be an important piece of this puzzle but without completely selling out the portfolio for yield.
I wouldn't focus on the returns looking back. It is designed to be less volatile than 60/40 which it is, with smaller drawdowns which has also been the case. Much smaller drawdowns. It gets a lot of yield from just three sources/25% of the portfolio but there would be a little interest rate risk using BTYB, less though than with VBAIX in case rates go up. Yes, in a deflationary environment, the book says yields go down but I don't want to bet on too much normalcy from the treasury market. If yields do go down then 10% in BTYB should get some benefit.
One thing I did not model in was asymmetry. I'm not sure Bitcoin is the answer in this context. I'm still holding as I outlined recently but if you want to model in a small slice to asymmetry I would look elsewhere like maybe uranium or something that might benefit from the AI gloomsday that Citrini is talking about.
Infrastructure as a theme might makes sense. Client personal holding CBOE might benefit if VIX trading and a few other things see outsized trading volume growth.
Going 100% cash is probably a bad way to go. It's suboptimal at a minimum in case Citrini turns out to be completely wrong about this or it kind of plays out the way they suggest but with a much smaller impact on the equity market. Even if they're exactly right, after stocks bottom out, they will start to go up and eventually make a new high. Guessing on when the bottom is in has a low probability of success. The first draft of this portfolio we created for this post has holdings that have the opportunity to go up, even be antifragile, in the face of Citrini's AI Gloomsday scenario.
BTAL, ARBIX, MERIX and NOC are in my ownership universe.
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.
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