Comprehensive Money Management

Bill's Blog

Happy Independence Day

Perhaps you’ve heard…  The first six months of 2022 was the worst yearly start for the US stock and bond markets for any period since 1970.  Most investors are down more than 20%.  Investors with concentrations in high-flying tech stocks are down 50% or more. 

You are not “most investors”. 

To the contrary…  We built your portfolio for times like this.  That foresight and wisdom is now paying off. 

Even after the recent sharp declines in stocks and bonds, your overall investment portfolio is still up nearly 20% over the past two years.  We are only off about 10% from our absolute all-time highs.  How is this possible?

Vindication for commodities

For years we resisted the temptation to exit commodities.  They were seemingly always a perpetual drag on our investment returns.  We didn’t give up on commodities because we knew the day would come when inflation would return.  Academics have long known that commodities have historically saved investment portfolios when both stock and bonds prices falter.  

Commodities more than fulfilled that promise by surging 117% over the past two years.  The commodities and other “real assets” in your portfolio (as compared to “financial assets” like stocks and bonds) are doing their job and doing it very well.  They are providing a strong buffer to financial assets that have been consistently dropping in value amid unexpectedly high inflation, rising interest rates and the war in Ukraine.

Commodities were assisted in the heavy lifting by our other related investments in energy infrastructure, food & farmland, water resources, raw materials and timberland.  Most investors don’t include separate allocations for “real assets” in their investment portfolios.  Consequently, they lack protection from unanticipated inflation, rising interest rates, wars, famines and other economic risks.  The recent massive gains in these asset classes largely offset the poor performance of traditional financial assets like stocks and bonds over the past year.  The majority of that benefit comes from owning these asset classes before inflation occurs and before the risk is generally understood and widely embraced.  That’s similar to the idea that it’s too late to buy insurance on your home when a fire has already started.  Or too late to shut the stable door after the horse is out of the barn.

Our Top 10 performing asset classes over the last 2 years (annual average): 

  • Commodities +58% per year (i.e., up +117% over 2 years combined)
  • Energy & materials companies up +34% per year
  • US energy infrastructure up +31% per year
  • Food & farmland companies up +23% per year
  • Timber companies up +19% per year
  • Water & environmental services companies up +16% per year
  • Global infrastructure up +15% per year
  • US real estate up +13% per year
  • Large-cap US companies up +12% per year (down -20% over the past 6 months)
  • Small-cap US companies up +10% per year (down -25% over the past 6 months)

Our Bottom 10 performing asset classes over the last 2 years (annual average):

  • Hedges & Macro Trends up +5% per year
  • International developed market companies up +4% per year
  • Innovation up +4% per year (includes the FAANGs and disruptive tech)
  • International real estate up +3% per year
  • International emerging market companies up +2% per year
  • Cash up +1% per year
  • Gold & gold mining companies up +0% per year
  • International developed market bonds down -3% per year
  • International emerging market bonds down -4% per year
  • US bonds down -5% per year

Not to belabor the point, but the past six months to two years have been one of our strongest periods of relative outperformance versus other investors in my firm’s 20-year history.  Nonetheless, it’s hard to celebrate that fact when prices are down from our last report.  Our commitment to real assets like commodities, infrastructure, food & farmland, water resources, energy & materials, timber and real estate is what sets us apart. We are down roughly 10% from our all-time highs while others are down by twice that percentage or more.  We are also up nearly 20% over the past two years while most investors are flat over the same period.  I use a 60/40 US stock/bond portfolio as the benchmark and a proxy for “most investors”.  In fact, we have consistently outperformed a typical 60/40 investment portfolio and the vast majority of investment managers over the past 5 years.  We achieved that result while taking on less risk.  That’s because we are extremely diversified over a wider variety of asset classes than most.  That gives us greater downside protection in a bear market and superior risk-adjusted returns. 

Our Recipe for Success (my analogy to food) 

A superior investment portfolio begins with sound portfolio construction and maintaining an active rebalancing discipline.  Jae tells me that building a great investment portfolio is a lot like making a great salsa (something I know little about).  Both start by adding high-quality ingredients that are then mixed together in roughly equal parts.  It’s a bit risky to make a meal of garlic alone, but when combined with other widely dissimilar ingredients, the addition of garlic makes for a better whole.

(Photo by Jae)

Like making great salsa, a great investment portfolio begins by adding high-quality ingredients in roughly equal parts.

(Photo by Bill)


Commodities and other real assets are the garlic, onions and cilantro in the salsa recipe.  You’d never eat them by themselves, but together they play an important role.  You can make a reasonably decent portfolio without commodities, but a great portfolio includes them too.  They enhance stability, reduce risk and add to long term returns. They add downside protection not only during periods of unexpectedly high inflation, but also gradually over long periods of time. 

Commodities stand alone against the ravages of inflation when stocks and bonds both falter.  Below is a chart of comparing the basic ingredients of our “7Twenty” investment model (7 primary assets with 20 different sub-asset classes).  The performance is measured over 50 years (from 1970 through 2020).  Each asset class beats to its own drummer from time to time.  Depending on the economic and political environment, some zig, while others zag.  However, you’ll notice that when combined together in equal proportion, magic happens.  The whole produces a better result than any of the top performing asset classes alone.  Commodities (often a perennial underperformer) is included due to its unique ability to bail out the other 6 from time to time.  

Notice that mixing all seven ingredients together in equal parts has produced an average annual return over the past 50 years that is roughly equal any of the top performing asset classes alone over that same period of time.  But also notice the equally-weighted blend had only 6 negative 3-year periods, while other individual asset classes had more.  Most importantly, note that the single worst 3-year return for the equally weighted 7-asset portfolio was -13.32%.  Compare that with the negative 3-year return periods between -37.61% and -55.60% for several of the individual asset classes that had similar average annualized returns. 

It's not really magic.  It’s just math. 

Mixing uncorrelated and negatively correlated assets in an investment portfolio reduces risk and improves returns.  The lack of correlation of one to the other smooths out the ride.  When combined, the downturns are shallower and recovery is quicker.  Minimizing the magnitude of market downturns is a critical element in building strong long-term performance. 

So… just like when you make a great salsa, adding these 7 ingredients together in an investment portfolio in roughly equal parts produces a better whole.  The resulting mix provides… 

  • Higher average investment returns over time
  • Less volatility (i.e., lower standard deviation)
  • Fewer negative years
  • Less downside during market downturns (i.e., “worst 3-year cumulative returns”)

The “magic” doesn’t stop there. 

There is another secret in the sauce – tax loss harvesting.  In keeping with the food analogy, I often refer to tax loss harvesting as a proverbial “free lunch”.

Tax-tax loss harvesting is a tax-optimization strategy for taxable investment accounts that adds value on top of periodic rebalancing.  Tax-loss harvesting involves selling positions that are currently valued at less than their original cost and replacing them with new positions that are expected to perform similarly to the asset sold. Losses are recognized for tax savings, but the overall asset class distribution and performance expectations do not change.  Harvested losses accumulate as “tax loss carryforwards” on your income tax returns.  They can be used to offset future taxable capital gains.  Current tax law also allows taxpayers to write off $3,000 per year of accumulated capital losses against ordinary income each year.

Most investment managers do not actively manage client portfolios for tax saving opportunities.  Our routine rebalancing and tax loss harvesting activities are relatively unique.  Most advisors see these time-consuming activities as outside of the scope of their responsibilities.  That’s a shame, as academic studies have consistently found that effective rebalancing and periodic tax loss harvesting add significant value to an investor’s net worth over time.  The recent market volatility is presenting us with the first significant tax loss harvesting opportunity since 2008.  It takes a lot of manual work, but I’ll be busy rebalancing accounts and harvesting losses in individual securities the remainder of this year. 


A great recipe is a great recipe whether it starts in Jae’s kitchen with a well-made salsa or starts in Bill’s office with a well-made pie. 

You have a very well-constructed and carefully managed investment portfolio that has historically generated average annual returns of 10% with lower volatility and less risk than any other alternative structure. 

Your investment performance has been outstanding relative to others in the current bear market.  We are significantly outperforming the market during this bear market downturn.  Our multi-asset structure and mathematically sound process provides considerably stronger downside protection than most.  I’ve discussed this before using historical charts and sound economic principles to demonstrate the logic.  Now you can see it in action with the actual performance of your own portfolio in real time. 

Our 7Twenty portfolio is fulfilling its promise that an equally-weighted, multi-asset portfolio of low-cost, tax-efficient ETFs provides better returns with less downside risk than other strategies that rely on the manager’s purported stock picking prowess or ability to time markets.  This same principle has been proven over and over by numerous academic studies.  Yet sadly, most of the industry (including the financial media) offer smoke and mirrors, and the illusion that any human being (or even a supercomputer for that matter) can effectively beat the markets over time.  The true magic comes from the mathematically sound principles of broad diversification over multiple asset classes, keeping costs low by utilizing index funds and ETFs, routine rebalancing and effective tax loss harvesting.  But that doesn’t sell magazines, doesn’t sell ads on CNBC, and doesn’t justify the salaries and bonuses of highly paid bankers who reside in in high-priced office space with private dining rooms in downtown Manhattan.  They offer little more than an empty promise that they have a better crystal ball than a similar firm across the street.

The current market volatility offers us a unique opportunity to harvest losses in individual investments without giving up any future performance potential on the rebound.  The tax savings can be even more significant over time than the investment earnings alone.    

Your portfolio is optimized for consistency of returns, lower risk, low cost and tax efficiency.  Tax loss harvesting opportunities also provide tangible dollar savings to build your net worth outside of the portfolio returns.

Your quarterly investment reports can be found by logging into your client portal at

Be Smart.  Be Well.  Be Kind.


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Happiness is the meaning and the purpose of life, the whole aim and end of human existence.” – Aristotle


Face it – you spend a lot of time at work – often more time than you spend with your family, with friends, more than you have for yourself. If you’re going have that much time invested in your business, you might as well enjoy it. You owe it to yourself to be happy in your career.


Let me begin by sharing what I consider to be the benchmarks of a successful career:


You love what you do.

You love who you do it with.

You are adequately compensated to support the lifestyle of your choice.


You need all three to be happy. If you’re coming up short on the first two, you’re not happy no matter how much money you make.  Income issues aside, let me introduce the ideas from a book called The How of Happiness.  Author Sonja Lyubormirsky (I’ll refer to her as Dr. Sonja), a Ph.D. research psychologist and psychology professor, has provided useful insights on the concept of happiness.


Dr. Sonja says that 50% of our happiness is fixed – a genetically dictated set point; 10% is circumstantial, or event driven – closing a big deal, getting a new car or taking a dream vacation will temporarily make us happy before we backslide to our set point.  Contrary to the popular saying, whoever has the most toys does not win, at least not in the long haul.  Finally, she has scientifically documented (with 44 pages of footnotes!) the effectiveness of a dozen “happiness activities” (daily intentional behaviors) that can help us permanently increase the remaining 40% of our personal happiness equation.


Let’s look at these 12 activities in the order they’re presented in the book. I’ll raise questions to get you thinking about how each can apply to your career:


1. Expressing gratitude. How many ways can you show that you’re grateful to those you work with?  Who has helped you along the way to your position today that you can acknowledge?  How can you show your clients/customers (both external and internal) that you appreciate their contributions to your success.


2. Cultivating optimism.  Your attitude is a reflection of your thoughts.  What effort do you make to keep yourself thinking positive and hopeful daily, despite “doom and gloom” media and negative people?  What kind of attitude do you bring to the office every day that lifts others’ spirits?


3. Avoiding overthinking and social comparison.  There’s always somebody richer, smarter, better looking, in better shape, etc. in the marketplace than you.  Are you willing to give up comparing yourself to them so you can value the unique human being you are?


4. Practicing acts of kindness.  How can you be a “kinder, gentler” person in the office? Do you go out of your way to do the little things that build your emotional bank account with your associates, no matter what their position?  How can you display generosity toward others, not so much with money as with your time and a listening ear?


5. Nurturing social relationships.  “To have a friend you’ve got to be a friend.”  How do you go about building business friendships?  Do you feel you have to always compete with your peers?  If so, can you turn those into friendly rivalries that spur on better performances from all?


6. Developing strategies for coping.  The world of work is not always fun and games – sometimes the going gets rough, as we’ve all experienced during a recession and the pandemic.  By what means do you keep yourself on a reasonably even keel during stressful periods?  How quickly do you bounce back from the inevitable setbacks you’ll face?


7. Forgiveness.  Occasionally (hopefully not often) people will do you wrong in your career.  Do you understand that holding on to vengeful thoughts toward others holds you back?  What do you do to get over a hurtful business relationship so you can move on?


8. Increasing flow experiences.  We are all familiar with “being in the zone.”  Are there certain behaviors you do that increase the likelihood you’ll get there more often?  What changes can you make to your physical workspace to facilitate this?


9. Savoring life's joys.  How often do you take time to smell the roses?  Or even smell the coffee at your local Starbucks on your way to the office?  Are there other things you take for granted that you could take a moment to enjoy throughout your day?


10. Committing to your goals.  Goals are essential for achievement.  It’s one thing to write them down – are you committed to making the effort to stretch yourself to achieve them rather than give up when things get hard?


11. Living ethically and purposefully.  The most successful people have found a way to develop a strong sense of higher purpose.  They have uncompromising ethics.  Do you make the effort to evolve yourself spiritually, whether through a traditional religious practice or via your own path?


12. Taking care of your body. The benefits of healthful eating, regular exercise and appropriate rest are well documented. Have you been carrying around an extra 20+ pounds from a junk food diet?  Does your health club membership card sit in your wallet unused?  Are you getting enough sleep to be bright eyed on the job without being a caffeine junkie?


Like any self-improvement regimen, Dr. Sonja asserts that you must make a sustained effort with these intentional activities to upgrade your level of happiness.  In other words, you’ve got to turn them into habits.  She provides clear guidelines on how to apply each of the 12, recommending you try a combination of several to see which ones fit best for you.


Though I bill myself as financial planner who helps my clients improve their financial bottom line, having them adopt these activities is really intended to help them improve their personal happiness.  Isn’t that what is life all about?


Aristotle answered that question almost 2,500 years ago.  It rings true today.

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Inflation and Interest Rates – Why They Matter

This blog is going to be long. I blame the word inflation, be it transitory or not, for inflating its length.  Many of the thoughts and words were compiled from articles written by two of my favorite authors on the subject of economics and investing:  Vitaliy Katsenelson and John Mauldin (from whom I have borrowed liberally). 


The number one question I am asked by clients, friends and random strangers is – “Are we going to have inflation?”

I think about inflation on three timelines: short, medium, and long-term. 

The pandemic disrupted a well-tuned but perhaps overly optimized global economy and time-shifted the production and consumption of various goods. For instance, in the early days of the pandemic, automakers cut their orders for semiconductors. As orders for new cars have come rolling back, it is taking time for semiconductor manufacturers, who, like the rest of the economy, run with little slack and inventory, to produce enough chips to keep up with demand. A $20 device the size of a quarter that goes into a $40,000 car may have caused a significant decline in the production of cars and thus higher prices for new and used cars.

Here is another example. The increase in new home construction and spike in remodeling drove demand for lumber while social distancing at sawmills reduced lumber production – lumber prices spiked 300%. Costlier lumber added $36,000 to the construction cost of a house, and the median price of a new house in the US is now about $350,000.

The semiconductor shortage will get resolved by 2022, car production will come back to normal, and supply and demand in the car market will return to the pre-pandemic equilibrium. This is transitory inflation.  It’s a strictly short-term phenomenon.  High prices in commodities are cured by high prices. High lumber prices will incentivize lumber mills to run triple shifts. Increased supply will meet demand, and lumber prices will settle at the pre-pandemic level in a relatively short period of time. That is the beauty of capitalism! 

Most high prices caused by the time-shift in demand and supply fall into the short-term basket, but not all. It takes a considerable amount of time to increase production of industrial commodities that are deep in the ground – oil, for instance. Low oil prices preceding the pandemic were already coiling the spring under oil prices, and COVID coiled it further. It will take a few years and increased production for high oil prices to cure high oil prices. Oil prices may also stay high because of the weaker dollar, but I’ll come back to that.

Federal Reserve officials have told us repeatedly they are not worried about inflation; they believe it is transitory, for the reasons I described above. I’m a bit less dismissive of inflation, and the two factors that worry me the most in the longer term are labor costs and interest rates. 

Let’s start with labor costs. 

During a garden-variety recession, companies discover that their productive capacity exceeds demand. To reduce current and future output they lay off workers and cut capital spending on equipment and inventory. The social safety net (unemployment benefits) kicks in, but not enough to fully offset the loss of consumer income; thus, demand for goods is further reduced, worsening the economic slowdown. Through millions of selfish transactions (microeconomics), the supply of goods and services readjusts to a new (lower) demand level. At some point this readjustment goes too far, demand outstrips supply, and the economy starts growing again.

This pandemic was not a garden-variety recession. 

The government manually turned the switch of the economy to the “off” position. Economic output collapsed. The government sent checks to anyone with a checking account, even to those who still had jobs, putting trillions of dollars into consumer pockets. Though output of the economy was reduced, demand was not. It mostly shifted between different sectors within the economy (home improvement was substituted for travel spending). Unlike in a garden-variety recession, despite the decline in economic activity (we produced fewer widgets), our consumption has remained virtually unchanged. Today we have too much money chasing too few goods– that is what inflation is. This will get resolved, too, as our economic activity comes back to normal.

Today, though the CDC says it is safe to be inside or outside without masks, the government is still paying people not to work. Companies have plenty of jobs open, but they cannot fill them. Many people have to make a tough choice between watching TV while receiving a paycheck from big-hearted Uncle Sam and working. Zero judgement here on my part – if I was not in love with what I do and had to choose between stacking boxes in Amazon’s warehouse or watching Amazon Prime while collecting a paycheck from a kind uncle, I’d be watching Sopranos for the third time. 

To entice people to put down the TV remote and get off the couch, employers are raising wages. For instance, Amazon has already increased minimum pay from $15 to $17 per hour. Bank of America announced that they’ll be raising the minimum wage in their branches from $20 to $25 over the next few years. The Biden administration may not need to waste political capital passing a federal minimum wage increase; the distorted labor market did it for them. 

These higher wages don’t just impact new employees, they help existing employees get a pay boost, too. Labor is by far the biggest expense item in the economy. This expense matters exponentially more from the perspective of the total economy than lumber prices do. We are going to start seeing higher labor costs gradually make their way into higher prices for the goods and services around us, from the cost of tomatoes in the grocery store to the cost of haircuts.

Only investors and economists look at higher wages as a bad thing. These increases will boost the (nominal) earnings of workers; however, higher prices of everything around us will negate (at least) some of the purchasing power. 

Wages, unlike timber prices, rarely decline. It is hard to tell someone “I now value you less.” Employers usually just tell you they need less of your valuable time (they cut your hours) or they don’t need you at all (they lay you off and replace you with a machine or cheap overseas labor). It seems that we are likely going to see a one-time reset to higher wages across lower-paying jobs. However, once the government stops paying people not to work, the labor market should normalize; and inflation caused by labor disbalance should come back to normal, though increased higher wages will stick around.

There is another trend that may prove to be inflationary in the long-term: de-globalization.  Even before the pandemic the US set plans to bring manufacturing of semiconductors, an industry deemed strategic to its national interests, to its shores. Taiwan Semiconductor and Samsung are going to be spending tens of billions of dollars on factories in Arizona.  

The pandemic exposed the weaknesses inherent in just-in-time manufacturing but also in over reliance on the kindness of other countries to manufacture basic necessities such as masks or chemicals that are used to make pharmaceuticals.  Companies will likely carry more inventory going forward, at least for a while.  But more importantly more manufacturing will likely come back to the US. This will bring jobs and a lot of automation, but also higher wages and thus higher costs.  

If globalization was deflationary, de-globalization is inflationary.  

I am not drawing straight-line conclusions, just yet. A lot of manufacturing may just move away from China to other low-cost countries that we consider friendlier to the US; India and Mexico come to mind.  

And then we have the elephant in the economy – interest rates, the price of money. It’s the most important variable in determining asset prices in the short term and especially in the long term. The government intervention in the economy came at a significant cost, which we have not felt yet: a much bigger government debt pile. This pile will be there long after we have forgotten how to spell social distancing.  The US government’s debt increased by $5 trillion to $28 trillion in 2020 – more than a 20% increase in one year! At the same time the laws of economics went into hibernation: The more we borrow the less we pay for our debt, because ultra-low interest rates dropped our interest payments from $570 billion in 2019 to $520 billion in 2020. 

That is what we’ve learned over the last decade and especially in 2020: The more we borrow the lower interest we pay. I should ask for my money back for all the economics classes I took in undergraduate and graduate school!

This broken link between higher borrowing and near-zero interest rates is very dangerous. It tells our government that how much you borrow doesn’t matter; you can spend (after you borrow) as much as your Republican or Democratic heart desires. 

However, by looking superficially at the numbers I cited above we may learn the wrong lesson. If we dig a bit deeper, we learn a very different lesson: Foreigners don’t want our (not so) fine debt. It seems that foreign investors have wised up:  They were not the incremental buyer of our new debt – most of the debt the US issued in 2020 was bought by Uncle Fed. Try explaining to your kids that our government issued debt and then bought it itself. Good luck.

Let me make this point clear: Neither the Federal Reserve, nor I, nor a well-spoken guest on CNBC knows where interest rates are going to be (the total global bond market is bigger even than the mighty Fed, and it may not be able to control interest rates in the long run). But the impact of what higher interest rates will do to the economy increases with every trillion we borrow. There is no end in sight for this borrowing and spending spree. 

Let me provide you some context about our financial situation. 

The US gross domestic product (GDP) – the revenue of the economy – is about $22 trillion, and in 2019 our tax receipts were about $3.5 trillion. Historically, the-10-year Treasury has yielded about 2% more than inflation.

Consumer prices (inflation) went up 4.2% in April and up 5%  in May. Today the 10-year Treasury pays 1.6%; thus, the World Reserve Currency debt has a negative 2.6% real interest rate (1.6% – 4.2%). 

These negative real (after inflation) interest rates are unlikely to persist while we are issuing trillions of dollars of debt. But let’s assume that half of the increase is temporary and that 2% inflation is here to stay. Let’s imagine the unimaginable. Our interest rate goes up to the historical norm to cover the loss of purchasing power caused by inflation. Thus, it goes to 4% (2 percentage points above 2% “normal” inflation). In this scenario our federal interest payments will be over $1.2 trillion (I am using vaguely right math here). A third of our tax revenue will have to go to pay for interest expense. Something has to give. It is not going to be education or defense, which are about $230 billion and $730 billion, respectively. You don’t want to be known as a politician who cut education; this doesn’t play well in the opponent’s TV ads. The world is less safe today than at any time since the end of the Cold War, so our defense spending is not going down (this is why I favor several defense stocks). 

The government that borrows in its own currency and owns a printing press will not default on its debt, at least not in the traditional sense. It defaults a little bit every year through inflation by printing more and more money. Unfortunately, the average maturity of our debt is about five years, so it would not take long for higher interest expense to show up in budget deficits. 

Money printing will bring higher inflation and thus even higher interest rates. 

If things were not confusing enough, higher interest rates are also deflationary. 

We’ve observed significant inflation in asset prices over the last decade; however, until this pandemic we had seen nothing yet. Median home prices are up 17% in one year. The wild, speculative animal spirits reached a new high during the pandemic. Flush with cash (thanks to kind Uncle Sam), bored due to social distancing, and borrowing on the margin (margin debt is hitting a 20-year high), consumers rushed into the stock market, turning this respectable institution (okay, wishful thinking on my part) into a giant casino. 

It is becoming more difficult to find undervalued assets. I am a value investor, and believe me, I’ve looked (we are finding some, but the pickings are spare). The stock market is very expensive. Its expensiveness is setting 100-year records. Except, bonds are even more expensive than stocks – they have negative real (after inflation) yields.

But stocks, bonds, and homes were not enough – too slow, too little octane for restless investors and speculators. Enter cryptocurrencies (note: plural). Cryptocurrencies make of the 1999 era look like a conservative investment (at least it had a cute sock commercial). There are hundreds if not thousands of crypto “currencies,” with dozens created every week. (I use the word currency loosely here. Just because someone gives bits and bytes a name, and you can buy these bits and bytes, doesn’t automatically make what you’re buying a currency.)

“The definition of a bubble is when people are making money all out of proportion to their intelligence or work ethic.” – The Big Short

I keep reading articles about millennials borrowing money from their relatives and pouring their life savings into cryptocurrencies with weird names, and then suddenly turning into millionaires after a celebrity CEO tweets about the thing he bought. Much ink is spilled to celebrate these gamblers, praising them for their ingenious insight, thus creating ever more FOMO (fear of missing out) and spreading the bad behavior.

Unfortunately, at some point they will be writing about destitute millennials who lost all of their and their friends’ life savings, but this is down the road. Part of me wants to call this crypto craziness a bubble, but then I think that’s disrespectful to the word bubble, because something has to be worth something to be overpriced. At least tulips were worth something and had a social utility. (I’ll come back to this topic later in the blog).

When interest rates are zero or negative, stocks of sci-fi-novel companies that are going to colonize and build five-star hotels on Mars are priced as if they already have regular flights to the Red Planet every day of the week.  Rising interest rates are good diffusers of mass delusions and rich imaginations. 

In the real economy, higher interest rates will reduce the affordability of financed assets. They will increase the cost of capital for businesses, which will be making fewer capital investments. No more 2% car loans or 3% business loans. Most importantly, higher rates will impact the housing market. 

Up to this point, declining interest rates increased the affordability of housing, though in a perverse way: The same house with white picket fences (and a dog) is selling for 17% more in 2021 than a year before, but due to lower interest rates the mortgage payments have remained the same. Consumers are paying more for the same asset, but interest rates have made it affordable.

At higher interest rates housing prices will not be making new highs but revisiting past lows. Declining housing prices reduce consumers’ willingness to improve their depreciating dwellings (fewer trips to Home Depot). Many homeowners will be upside down in their homes, mortgage defaults will go up… well, we’ve seen this movie before in the not-so-distant past. Higher interest rates will expose a lot of weaknesses that have been built up in the economy. We’ll be finding fault lines in unexpected places – low interest has covered up a lot of financial sins.

And then there is the US dollar, the world’s reserve currency. Power corrupts, but unchallenged and unconstrained the power of being the world’s reserve currency corrupts absolutely. It seems that our multitrillion-dollar budget deficits will not suddenly stop in 2021. With every trillion dollars we borrow, we chip away at our reserve currency status (Vitaliy Katsenelson of Contrarian Edge has written about this topic in great detail, including our national complacency and arrogance, and things have only gotten worse since). And as I mentioned above, we’ve already seen signs that foreigners are not willing to support our debt addiction. 

Am I yelling fire where there is not even any smoke? 

Higher interest rates are anything but a consensus view today. Anyone who called for higher rates during the last 20 years is either in hiding or has lost his voice, or both. However, before you dismiss the possibility of higher rates as an unlikely plot for a sci-fi novel, think about this. 

In the fifty years preceding 2008, housing prices never declined nationwide. This became an unquestioned assumption by the Federal Reserve and all financial players. Trillions of dollars of mortgage securities were priced as if “Housing shall never decline nationwide” was the Eleventh Commandment, delivered at Mount Sinai to Goldman Sachs. Or, if you were not a religious type, it was a mathematical axiom or an immutable law of physics. The Great Financial Crisis showed us that confusing the lack of recent observations of a phenomenon for an axiom may have grave consequences. 

Today everyone (consumers, corporations, and especially governments) behaves as if interest rates can only decline, but what if… I know it’s unimaginable, but what if ballooning government debt leads to higher interest rates? And higher interest rates lead to even more runaway money printing and inflation? 

This will bring a weaker dollar. 

A weaker US dollar will only increase inflation, as import prices for goods will go up in dollar terms. This will create an additional tailwind for commodity prices. 

If your head isn’t spinning from reading this, I promise mine is from having written it. 

To sum up: A lot of the inflation caused by supply chain disruption that we see today is temporary. But some of it, particularly in industrial commodities, will linger longer, for at least a few years. Wages will be inflationary in the short-term and will reset prices higher, but once the government stops paying people not to work, wage growth should slow down. Finally, in the long term a true inflationary risk comes from growing government borrowing and budget deficits, which will bring higher interest rates and a weaker dollar with them, which will only make inflation worse and will also deflate away a lot of assets.

Question:  How do I invest your money to prepare for the possibility of higher inflation? 

Answer:  Thoughtfully and humbly.

We need to recognize that inflation in the long-term is a probability but not a certainty. Macroeconomics is a voodoo science; it appropriately belongs in the liberal arts department. The economy is an incredibly complex and unpredictable system.

Here is an example: Japan is the most indebted developed nation in the world (its debt-to-GDP exceeds 260%, while ours is 130% or so). Its population is shrinking, and thus its level of indebtedness per capita is going up at a much faster rate than the absolute level of debt. Anyone, including yours truly, would have thought that this forest full of dry wood was one lightning strike away from a disastrous conflagration. And yet Japanese interest rates are lower than ours and the country has been mired in a deflationary environment for decades.

Admittedly, Japan has a lot of unique economic and cultural issues: Companies are primarily run for the benefit of employees, not shareholders (unproductive employees are never let go); there are a lot of zombie companies that should have been allowed to fail decades ago; and the Japanese asset bubble burst in 1991, when debt-to-GDP was only 60%. The point still stands: Long-term forecasting of inflation and deflation is an incredibly difficult and humbling exercise.

As investors we have to think not in binary terms but in probabilities. The acceleration of our debt issuance and our government’s seeming indifference to it and to ballooning budget deficits raise the probability and the likely severity of inflation. At the same time, we have to accept the possibility that the economic gods are playing cruel games with us gullible humans and have deflation in store for us instead.

Inflation and higher interest rates are joined at the hip. The expectation of higher inflation will raise interest rates, as bond investors will demand a higher return. This in turn will result in larger budget deficits and more money printing and thus more borrowing and even higher interest rates.

Here is how I am positioning your portfolio for the risk – the possibility, not the certainty – of long-term inflation and higher interest rates: More than half of your assets were chosen specifically for their likely ability to withstand higher inflation. 

·       Value-oriented companies that have “pricing power”, i.e., the ability to raise prices without losing sales. 

·       “Real assets” such as global infrastructure, utilities, US energy infrastructure (pipelines), commodities and gold. 

·       Natural resource companies focused on basic needs such as food, water, timber, energy and industrial metals and materials. 

And here’s how I am positioning your portfolio for the risk – the possibility, not the certainty – of long-term price stability, deflation and continued low interest rates:  The other half of your assets were chosen specifically for their likely ability to flourish during periods of low inflation. 

·       US and global bonds

·       US and global high growth companies

·       Innovation including young high-growth companies focused on artificial intelligence, virtual reality, robotics, 3-D printing, internet security, electric and self-driving vehicles, internet of things and other disruptive technologies that flourish when the cost of capital is low.

Valuation matters more than ever. Higher interest rates are an inconvenience to short-duration assets whose cash flows are near the present and devastating to long-duration assets. Here is a very simple example: When interest rates rise 1%, a bond with a maturity of 3 years will decline about 2.5%, while one with a maturity of 30 years will decline 25% or so.  This is why I keep most of your bond portfolio in short-duration assets.

The same applies to companies whose cash flows lie far in the future and who are thus very sensitive to increases in the discount rate (interest rates and inflation). Until recently they have disproportionally benefited from low interest rates. They are the ones that you will most likely find trading in the bubble territory today. But their high valuations (high price-to-earnings ratio) will revert downward. Value stocks will be back in vogue again. We have started seeing the rotation from growth to value recently.

Inflation will benefit some companies, be indifferent to others, and hurt the rest. To understand what separates winners from losers, we need to understand the physics of how inflation flows through a company’s income statement and balance sheet.

Let’s start with revenue. Higher prices across the economy are a main feature of inflation. We want to own companies that have pricing power. 

Pricing power is the ability to raise prices without suffering a decline in revenue that comes from customers’ inability to afford higher prices or from the loss of customers to competitors.

Companies that have strong brands, monopolies, or products that represent a very small portion of customer budgets usually have pricing power.

If Apple raises prices on the iPhone, you’ll curse Steve Jobs and pay the higher price. (A friend of mine curses him every time the iPhone frustrates him. I keep reminding him that Steve is no longer with us. Doesn’t help.) Of course, if Apple raises iPhone prices too much and its products become unaffordable, consumers may just start buying iThings less often.

Food, water, and utility companies have pricing power. We own plenty of these stocks, too. The same applies to most consumer staples.

What the pandemic showed us is that humans are adaptable creatures – you throw adversity at us, we’ll indulge in angry outbursts but we’ll adapt. The rate of change of inflation matters even more than absolute rate of inflation. If inflation remains predictable, even at a higher level, then businesses will plan for and price it into their products. If the rate of growth is highly variable, then there is going to be a war of pricing powers for shrinking purchasing ability of the end customer. We want to own companies that are on the winning side of that war.

Let’s go to the expenses side of the income statement. Companies whose expenses are impacted the least by rising prices do well, too. Generally, companies with larger fixed costs versus variable costs do better. 

It is important to differentiate whether the capital intensity of a business lies in the past or in the future. A business whose high capital intensity is in the past benefits from inflation. Think of a pipeline company, for instance (we own plenty of those). Most of its costs are fixed, and they have been incurred in yesterday’s pre-inflation dollars. The cost of maintaining pipelines will go up, but in relation to the total cost of constructing pipelines these costs are small. However, companies that operate pipelines have debt-heavy balance sheets, which can become a source of higher costs. Pipeline companies we own have debt maturities that go out many decades into the future. They’ll be paying off these debts with inflated cash flows.

I’ve seen studies that looked at asset prices over the last few decades and declared “These assets have done the best in past inflations.” Most of these studies missed a small but incredibly important detail: The price you pay for the asset matters. If we are entering into an inflationary environment today, it is happening when asset prices are at the highest valuation in over a century. (This was not always the case during the period covered by these studies.)

For instance, one study showed that REITs have done well during past inflations. This may not be the case going forward. Aside from its being a very broad and general statement (not all REITs are created equal), low interest rates brought a lot of capital into this space and inflated valuations. Investors were attracted to current income, which was better than from bonds, and they paid little attention to the valuations of the underlying assets.

I cannot stress this point enough: Whatever landscape is ahead; we are entering into it with very high valuations and an economy addicted to low interest rates.

We have to be very careful about relying on generalized comments about past inflations. We need to be nuanced in our thinking.

We get asked a lot about gold and cash

Gold: I don’t have a great love for gold.  We own a modest amount in your portfolio as a hedge. We discussed it in the past in great depth, so I won’t bore you with it here.

Cash: I am basically referring to short-term bonds, which seem like the most comfortable asset to be in today. However, their ability to keep up with inflation has been spotty in the past. It is okay in the short term but likely to be value-destructive in the long term. Our view on cash has not changed: In a portfolio context cash should be a residual on other investment decisions. In our portfolios cash is what is left when we run out of investment ideas.

Investing outside of the U.S.

The U.S. government was not the only one borrowing and paying people to stay at home. But the US has done it to a much greater degree than others. Most importantly, we are not slowing down our spending (and thus borrowing), which will likely lead to a weaker dollar. If nothing else, a declining dollar makes foreign securities more valuable in U.S. dollars. The probability of a stronger dollar is low.

But there is more.

The next decade will likely belong to ex-U.S. investing. If you invested outside the U.S. over the last decade, your returns were overshadowed by the gigantic outperformance of the U.S. markets. Today the US is the most expensive developed market. Take Europe, for instance; most European stocks are still trading below 2007 highs. UK stocks trade at a half of the valuation of U.S. stocks.

Our approach to investing is very simple: We are diehard value investors looking for high-quality companies that are significantly undervalued and run by great management. We do not change into flamboyant value-indifferent investors when we cross the border. International investing just gives us a greater palette with which to paint our investing canvas.

We’ve been doing ex-U.S. investing for a long time. Today, about half of our portfolio is outside the US.

If you thought I had a silver bullet and easy answers, I don’t. I know what I am about to say may fall on deaf ears, especially since we are in an apparently never-ending bull market. But as steward of your capital, my most important objective is survival (avoiding permanent loss of capital and maintaining purchasing power) in both inflationary and deflationary environments.  Our goal is to achieve market-like returns with less than market-like risk.

Last decade risk did not matter. Risks were only figments of our imagination, as money printing by the Fed, which was trying to fix a lot of sins and became the biggest sin of all – significantly distorting the price of money and thus the economy. But as Charlie Munger said, “If you are not confused about the global economy, you don’t understand it.”

A suddenly appearing iceberg is life-threatening to a speedboat (or cruise ship), but it is just an unpleasant inconvenience for an icebreaker. Our goal is to have a portfolio of icebreakers. We are playing a different game – we are not racing against the speedboats. We take comfort in knowing that, while the speedboats may outrace us for some time, they are bound to eventually hit an iceberg and sink. One iceberg that we have an eye on today is inflation and higher interest rates (though we are prepared for deflation and lower rates too).

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An Exponential Ride

I've got to admit it's getting better
A little better all the time
I have to admit it's getting better
It's getting better since you've been mine
Getting so much better all the time

– Getting Better, Paul McCartney and John Lennon, 1967, “Sgt. Pepper’s Lonely Hearts Club Band” album

The last year brought exponential growth in – among other things – use of the word “exponential.”  It is now the go-to term when you want to say something is “growing super-fast.”

As humans, we tend to think in terms of linear growth – whatever is happening immediately around us in shorter time periods.  Accelerating, exponential growth is harder to grasp.  Exponential growth means the rate of growth increases with time, just like a car goes faster the more you press the gas pedal.

“Exponential” has become popular recently to describe the way a virus spreads, if nothing stops it.  When one person infects two others, each of whom infects two others, who each infect two others and so on, the numbers can quickly get out of hand.  Exponentially so.

But exponential growth isn’t always scary.  Compound interest is exponential and we all enjoy it (when we’re the lender, at least).  Moore’s Law, which says the number of transistors on integrated circuits doubles approximately every two years, is another example of extremely useful exponential growth.

The number of transistors on a microchip “only” doubles every two years. But that took it from 1,000 transistors to 50 billion in 50 years. Literally, 50 million times more powerful.

But it’s even better. If you go back to the late 1940s when transistors were first being developed, having 1,000 transistors on something called a microchip was barely a dream.  But with time and literally tens of thousands of patents and innovations, etc., we got to 50 billion.  People have been proclaiming the end of Moore’s law for decades.  I’ll take the other side of that bet and we are just exploring the edges of quantum computing.

Read a little about the chip industry’s growth and you’ll see words like “surprise” and “accidental” discoveries.  You’ll also see that it didn’t happen in one place at one time but was literally exploding all over.

But the exponential growth of the microchip would not have been possible without the exponential growth of all sorts of technologies and innovations developed over the previous 100 years. That’s the amazing thing about innovation.  Or, more broadly, we could just call it “progress.”

Humanity is constantly learning and improving.  These improvements build on themselves in an exponential process.  That’s why daily life changed far more in the last 200 years than it did in the prior 20,000 years.  The rate of growth accelerated.  And that’s why we will see more change in the next 20 years than we have seen in the last 200.  Yes, THAT is exponential.

Today we enjoy living standards far higher than even royalty did not so long ago.  Yes, we have problems, serious ones, but we also have advantages.  We know we can make the world better because it is getting better.  And it’s getting better all the time, at least over time.

This month’s blog is dedicated to highlighting good news – positive things that are happening all around us, often unnoticed or unappreciated.  I’ll get back to the problems of the day later, but today I want us to appreciate the positive.  There’s a lot of it out there.  And any serious investor should pay attention because technological innovation is where the real financial upside is (along with, admittedly, a lot of dead-end alleys).

Pandemic Pluses

This year’s top good news, by far, is the COVID-19 vaccines. It was a mind-boggling scientific, manufacturing, and distribution achievement. To have a vaccine at all is amazing; to have several of them only a year after the virus was identified is unprecedented.  This kind of work once took decades.  Operation Warp Speed was indeed a triumph of human work, cooperation between the private and public sectors, effort, and ingenuity.

This happened in part because scientists had been working on the underlying methods and technologies for a long time, not knowing they would be useful in a pandemic.  You can read the whole gripping story in The Atlantic by Derek Thompson.

Briefly, “messenger RNA” (ribonucleic acid) is a genetic substance that tells your cells which proteins to make.  Researchers in various places realized long ago that manipulating RNA could be quite useful, but exactly how to do it was elusive.

It turns out that Hungarian scientist Katalin Karikó discovered mRNA back in 1978.  She eventually ended up at the premier epidemiological university in the United States, the University of Pennsylvania, where she worked on her discovery with other scientists. Eventually in 2000 they began to see some success.

Private companies began working on mRNA products, with Moderna in the US and BioNTech in Germany eventually cracking the code.  US pharmaceutical giant Pfizer had made a deal with BioNTech in 2018 to develop an mRNA flu vaccine.  When SARS-CoV-2 struck, they pivoted quickly.  The result went into my arm a month ago and again this week (and I hope yours as well).  The technology they developed may well lead to other life-saving medicines, like a malaria vaccine (with a variation of mRNA technology) and individually tailored cancer treatments.

I want to focus a little bit on how incredibly successful the actual vaccine is, and to highlight some of the misinterpretations of statistics by the public.  I’ve been participating in a multi-part education program for financial advisors that focuses on the massive amounts of research on COVID that comes out weekly.  This crossed my desk this week:

So, with a 50% effective vaccine, we have a 50% chance of contracting COVID-19, and with a 95% effective vaccine, we have a 5% chance… right?

Actually, the news is much better. Consider what that “95% effective” statistic actually means.  As The New York Times' Katie Thomas explained, the Pfizer/BioNTech clinical trial engaged nearly 44,000 people, half of whom received its vaccine, and half a placebo.  The results? “Out of 170 cases of COVID-19, 162 were in the placebo group, and eight were in the vaccine group.”  So, there was a 162 to 8 (95% to 5%) ratio by which those contracting the virus were unvaccinated (albeit with the infected numbers surely rising in the post-study months).  Therein lies the “95% effective” news we’ve all read about.

So, if you receive the Pfizer or equally effective Moderna vaccine, do you have a 5% chance of catching the virus?  No. That chance is far, far smaller: Of those vaccinated in the Pfizer trial, only 8 of nearly 22,000 people, less than 1/10th of one percent (not 5%), were found to have contracted the virus during the study period.  And of the 32,000 people who received either the Moderna or Pfizer vaccine, how many experienced severe symptoms?  The grand total, noted David Leonhardt in a follow-up New York Times report: one.

German Scientist Gerd Gigerenzer says that his nation suffers from the same underappreciation of vaccine efficacy.  “I have pointed this misinterpretation out in the German media,” he notes, “and gotten quite a few letters from directors of clinics who did not even seem to understand what’s wrong.”  “Be assured that YOU ARE SAFE after vaccine from what matters—disease and spreading,” tweeted Dr. Monica Gandhi of the University of California, San Francisco.

Of 74,000+ participants in one of the five vaccine trials, the number of vaccinated people who then died of COVID was zero. The number hospitalized with COVID was also zero:


This is simply mind-boggling, in terms of not just the speed at which the vaccines were developed but also their efficacy. But just like the 442,000 Teraflop per second computer (the world’s fastest computer now in Japan), the successful vaccine would not have been possible without the multiple decades of work developing it, let alone the even longer period of research prior to the discovery of mRNA.  Moderna literally had a working vaccine model within 48 hours after learning the DNA sequence.  Six weeks later, it shipped its first vaccine batches to laboratories in Maryland to begin human trials.  The summary from The Atlantic article mentioned above:

“The triumph of mRNA, from backwater research to breakthrough technology, is not a hero’s journey, but a heroes’ journey.  Without Katalin Karikó’s grueling efforts to make mRNA technology work [in 1978], the world would have no Moderna or BioNTech.  Without government funding and philanthropy, both companies might have gone bankrupt before their 2020 vaccines (Reagan was wrong on this one…sometimes it takes government to do things that private industry alone cannot).  Without the failures in HIV-vaccine research forcing scientists to trailblaze in strange new fields, we might still be in the dark about how to make the technology work.  Without an international team of scientists unlocking the secrets of the coronavirus’s spike protein several years ago, we might not have known enough about this pathogen to design a vaccine to defeat it last year.  mRNA technology was born of many seeds.”

The vaccines may be what gets us out of the pandemic, but the experience drove some other unintentional innovation, too.  One was remarkably simple: Remote doctor visits.  Many medical issues can be handled with a simple conversation, but (at least in the US) it rarely happened for legal, liability, and insurance reasons.  The pandemic compelled all the players to cut through those barriers.  I don’t think we will be going back.

This also illustrates the exponential growth principle.  Now that remote medicine is allowed and people (both providers and patients) are getting comfortable with it, we will expand the range of services delivered that way.  Technology will be the key – or rather, a bunch of technologies working together. Virtual reality cameras and visors, 5G bandwidth, haptic sensors to convey “touch” without being there – all will speed up the process and should lead to better outcomes.

But even as the pandemic unfolded, other innovation continued. Let’s look at some more examples.

Food Future

The last year also gave many of us a new relationship with our food. With restaurants closed or limited, we did more of our own cooking.

In fact, our food habits and methods are always changing.  Many plants we eat simply didn’t exist in their current form even a century ago.  They have been cross-bred and manipulated into what we know now.  That process is continuing as several companies now offer plant-based meat substitutes.  As often happens with new technologies, prices are falling and people are finding new uses for the products.

Material Factors

Some of the most amazing breakthroughs are also the most basic: the materials we use to build everything else.  Hydrogen, for instance, is the most abundant element in the universe yet we have long struggled to isolate and make use of it.  This is changing.

The current process for producing hydrogen consumes a lot of energy itself, and also emits large amounts of greenhouse gases.  Another method called electrolysis is simpler and cleaner.  All you need is water and electricity.  The electricity can come from renewable sources.  That means hydrogen can (in theory) be produced almost anywhere, reducing the need to haul fossil fuels around the world.

Beyond hydrogen, other materials science breakthroughs are brewing everywhere.  Graphene, which is basically a sheet of carbon just one atom thick, nearly weightless but 200 times stronger than steel.  Scientists refer to it as a “super-material” for obvious reasons.  The applications are endless.

There are also major breakthroughs in nanotechnology – manipulating matter at super-microscopic levels.  This is a bit unbelievable so I’m going to list but a few:

Progress has been surprisingly swift in the nano-world, with a bevy of nano-products now on the market.

Never want to fold clothes again?  Nanoscale additives to fabrics help them resist wrinkling and staining.

Don’t do windows?  Not a problem!  Nano-films make windows self-cleaning, anti-reflective, and capable of conducting electricity.

Want to add solar to your house?  We’ve got nano-coatings that capture the sun’s energy.

Nanomaterials make lighter automobiles, airplanes, baseball bats, helmets, bicycles, luggage, power tools—the list goes on.

Researchers at Harvard built a nanoscale 3D printer capable of producing miniature batteries less than one millimeter wide.

And if you don’t like those bulky VR goggles, researchers are now using nanotech to create smart contact lenses with a resolution six times greater than that of today’s smartphones.

And even more is coming.  Right now, in medicine, drug delivery nanobots are proving especially useful in fighting cancer.  Computing is a stranger story, as a bioengineer at Harvard recently stored 700 terabytes of data in a single gram of DNA.

The applications are endless.  And coming fast.  Over the next decade, the impact of the very, very small is about to get very, very large.

Again, all this is coming now.  And as I described above, the real impact is exponential.  Using nanotechnology to solve these problems will free up the productivity currently being applied to them, so it can be multiplicatively used for something else.  What would that be?  Probably things we can’t presently imagine.

While we are approaching the limits of lithium-ion batteries, there are literally scores of new technologies being developed which will far surpass current technology.  The ultimate green energy, fusion energy, is fast becoming more than a pipe dream.  There is a revolution in agricultural production that will completely disrupt current production cycles over the next 20 years.  A little slower than Moore’s Law, but just as powerful.

You may have missed that last year Brown University scientists began wirelessly connecting the human brain in quadriplegics. An electrode array is attached to the brain’s motor cortex and then high-speed networks allow the patient to communicate.  We are not all that far from the day when, if you choose, you will be able to “talk” directly to your computer simply by thinking.

Entrepreneurial Shifts

Our most important natural resource, by far, is the human mind. Any one of them has astonishing potential all by itself.  When we put them together, true magic happens.

As you know, this pandemic/recession has destroyed hundreds of thousands of small businesses all over the world.  But it didn’t destroy the entrepreneurs who founded them.  I believe many will do what comes naturally to them and start more businesses – hopefully better than those they lost.

Transitions are hard but often lead to a better place. I believe some wonderful new ideas – and very successful businesses – will emerge from this time.  I can’t wait to see what they are.

We literally live in one of the most exciting periods in all of human history.  Oh, did I not mention the possibility that we might live a great deal longer than previous generations?  Of course, that’s a financial planner’s nightmare since we design retirement spending scenarios designed to last at most 30 years.  Maybe in the next positive letter…

Exponential and Your Investment Portfolio

What are we doing with your investment portfolio to ride this wave of exponential progress into the future?  Step one was the introduction of an entirely new asset class which I have labeled “Innovation”.  In this category we focus on companies leading the exponential wave into the future. Investments in this category include (among others) …

·       SPDR Kensho New Economies ETF (symbol KOMP) constructed around themes such as autonomous vehicles, 3D printing, genetic engineering and nanotechnology.

·       iShares Exponential Technologies ETF (symbol XT) big data and analytics, nanotechnology, medicine, networks, energy and environmental systems, robotics, 3-D printing, bioinformatics and new financial services technologies (fintech).

·       ALPS Disruptive Technologies ETF (symbol DTEC) 100 companies focused on 10 themes including healthcare innovation, internet of things, clean energy & smart grid, cloud computing, data & analytics, fintech, robotics & AI, cybersecurity, 3D printing, and mobile payments – all with a focus on disruptive technologies and innovation.

·       ARK Innovation ETF (symbol ARKK) specializing in bleeding edge companies in the areas of genomic revolution, industrial innovation, digital currencies and artificial intelligence)

Lastly, even outside the Innovation category, we focus on companies run by management teams that are progressive, forward-thinking and that embrace change.  This is particular evident in those areas of your investment portfolio dedicated to food, water and clean energy.  Even in the international emerging market category, we focus on consumer growth companies and “cash cows” benefiting from exponential growth in the internet, mobile computing, 5G, disruptive retail and innovative healthcare solutions.

The New Roaring 20’s

The original roaring 20’s was the ten-year period that followed the pandemic of 1917.  That too was marked by exponential growth in communications (the telephone and radio), the automobile, mass consumerism and social, artistic and cultural dynamism.  So far at least, the roaring 20’s of 2021 looks quite similar.

Jae and I are looking forward to being able to travel soon.  He gets his second Moderna vaccine in a few weeks.  We’ve also closed on our purchase of a co-op apartment on the western edge of New York City’s Central Park, which will be our permanent home away from home. 

I truly hope that we avoid a fourth wave (which coincidentally was the same number of waves experienced in the pandemic of 1917-1918) – and that more of the country and the world opens up soon.  But to do that we really need to encourage everyone to get their vaccinations.  Then we can relax these intrusive precautionary measures and people will get on with their lives, both personally and professionally.

That being said, we will probably face versions of COVID-19 for years.  New variants will develop in countries that have not been able to vaccinate and achieve herd immunity.  The doctors and scientists I follow fully expect that we will need periodic booster shots for a few years at least.  But I know of several companies that are also working on a “universal” vaccine.

Beyond vaccines, technologies are being developed that will constantly clean viruses and bacteria from our homes and gathering places, with no harm to human beings. Nano robots have been invented to clear our arteries of plaque.  Further innovations of that technology will be available before the end of the decade that I think will become ubiquitous.



Most of the credit for this month’s blog goes to the NY Times best-selling author and renowned financial geopolitical expert, John Mauldin for many of the thoughts, words and ideas included in this month’s blog. 


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It’s a Whole New World

So much has changed in our lives in 2020.  Everyone is feeling stressed.  Here are a few of today’s top stressors.  It’s not a complete list.  What are your top 5 stressors?  And what does it say about our current situation if you have difficulty limiting your list to just 5?



Sickness and death


Job loss/Furloughs



Wild Fires





Cabin fever




Systemic bias



Food Insecurity



Sense of loss


Fear of dying alone



Political extremism


Conspiracy theories


Weight gain

Political protest


Unconscious bias



White Supremacy

Proud Boys

Police shootings


Hate speech

Extreme partisanship


Hatred of elites



No Funerals


Climate Change


Election fraud

No Weddings


Mass Shootings


Fact checking

Fox News


Rachel Maddow


Racial Justice

Institutional Norms

Deep State

Social Distancing


Fake News

Foreign Interference

Hate Speech



Loss of Civility

Media Bias




You’ll notice that “investment performance” is not on the list.  Developing and implementing your investment strategy is my job, not yours.  I’m good at it because I have the time and interest to consistently learn.  I’m constantly seeking out new ideas to minimize risk and maximize future returns.  Managing risk is my specialty.  Diversification, strategic thinking and careful research are my primary tools.

Covid-19 is disrupting societies, economies, and markets around the world like no other crisis since World War II.  Policymakers, health workers, business and investors have been caught flat-footed, and without a playbook.  Adoption of trends that were already well underway have accelerated at a breathtaking pace, and new trends have emerged.  Working from home, online grocery delivery, home fitness, online education, relocation from cities to suburbs, online shopping, restaurant delivery, e-sports and video games, and dozens of other new trends are now firmly in place and here to stay.  Change is always stressful, especially when the speed is breathtaking.  When it comes to your investment portfolio, you can relax and take a deep breath.

I’ve spent much of the past 6 months rethinking investment strategy to adapt to the new realities.  I’ve attended two week-long strategic investing conferences for investment professionals.  I’ve participated in dozens of daily webinars hosted by fund companies and industry leading educators.  Both of the strategic investment conferences (originally scheduled for Phoenix and for Sydney) were virtual online events this year.  I’ve heard from 60+ leading investment thinkers from around the world.  I’ve listened to podcasts and finished more than a dozen audible books online.  The voices included portfolio managers, CIOs, senior investment analysts, investment strategists, economists, independent consultants and practitioners. Each offers his/her best high conviction ideas on contemporary and emerging portfolio construction strategies, to help us build better quality investor portfolios in a whole new world.

Even as I continue my own education, I’ve been busy making strategic changes to our investment strategy and investment selections.  This was necessary as the rules have changed. 

First, it’s important to understand that you remain highly diversified across 20 different asset classes, each chosen for specific reasons.  That part has not changed.  The changes I’m referring to are occurring within each of the asset classes.  Each change will be highlighted in some depth below. 

My goal is always to minimize risk and volatility while achieving market-like returns over time.  Like pieces in a puzzle (or players on a sports team), each asset class plays a very specific role in portfolio construction.  Some benefit from inflation.  Some deflation.  Some from economic growth.  Some from economic slowdown.  Others from rising interest rates.  Others from falling rates.  I could go on.  When we put them together, the whole is greater than the sum of the parts.  And each part is absolutely necessary to fully maximize the benefits for the whole.

A robust, carefully constructed investment portfolio with routine tax-aware rebalancing protects us from the negative consequences of making reactive investment decisions.  It avoids adverse outcomes that typically result from undisciplined portfolio decisions and unpleasant surprises on your tax return.  But a thoughtful strategy and robust framework is not enough.  Investment processes must be flexible enough to shift with changing paradigms, to avoid introducing unintended risks into portfolios.  It helps to have a clearly articulated and defined investment philosophy and framework to overcome our human tendencies, and successfully navigate treacherous conditions such as those experienced in 2020.

For the past 50 years we’ve lived in a period of mostly declining interest rates.  Rates have fallen from more than 20% in the early 80’s to negative in some parts of the world today.  That represented a tailwind for stocks, bonds and real estate for most of those years.  Returns of 8% to 10% were common during much of our investing lifetimes.  A new reality has now set in.  Today rates have nowhere to go but up.  Valuations are stretched by historic standards.  Demographically most of the developed world is aging and exiting their most productive years.  Economic growth and the investment return that it generates are increasingly harder to come by.  Much of the growth we have seen in recent years can be directly attributed to Fed policies that effectively pull future returns forward.  As a consequence, Investment returns for diversified portfolios are likely to average no more than 4% to 5% per year over the next 5 to 10 years.  This is the consensus among most economists and Wall Street banks.  Northern Trust was the latest institution to lower their long-term return forecast to 4% just last week, joining JP Morgan, PIMCO, and others (see the “Ivy Portfolio Index” attached).

Meanwhile, central bank “money printing” to prop up the economy has added increased risks to the financial system including the fear of resurgent inflation or even a potential monetary collapse.  A global pandemic still has yet to run its course, potentially leaving a path of both physical and economic pain that has yet to be fully realized.

We are entering a period of great unknowns.  The greatest minds of our time are wise enough to know that we have never been here before and none of us can accurately predict where we’re going from here.  Depressed yet?  Don’t be.  A lot of good things are happening at the same time.

A bull case can be built on the fact that we’re entering a period of great technological innovation and dramatic increases in productivity.  Self-driving cars, 3-D printing, “internet of things”, wearable technology, cloud computing, genomic engineering, robotics and artificial intelligence are disrupting and revolutionizing our world. 

A bear case can be made that these disruptive technologies are resulting in rapid change that may be beyond our ability to cope – at least in the short term.  Just ask Alexa if you’d like to know more! 

While I am a long-term optimist, I place no short-term bets either way.  Your portfolio will help us prepare for all possible scenarios.  There will be winners and losers among your 20 asset classes.  That is by design.  You’re positioned for all possible scenarios.  No matter which scenario unfolds and at what pace, your portfolio is designed to produce market-like returns with as little drama as possible. 

Here’s a brief description of some of the changes that I’m begun making inside the 20-asset class structure of your investment portfolio.  Note that underlined names and phrases in blue are links to more information.  These changes will better position us for success in this new world:

Equities:  Broad-Based

US Large Cap Stocks: No doubt that you’ve heard that a handful of stocks now make up more than 25% of the market capitalization – Facebook, Apple, Amazon, Netflix, Google (FAANG).  In fact, the largest 50 of the 500 companies that make up the S&P 500 index now represent well over half of the S&P.  Even as these top 50 have become quite expensive, many of the 450 remaining offer compelling values.  I’m focusing on individual companies that produce high “free cash flow”.  These are solid companies that generate cash income beyond what is needed for reinvestment in the businesses.  Many of these companies pay solid and sustainable dividends, can add value by buying back stock, and have solid earnings growth prospects for the future.  These are the “Cash Cows” of the S&P.  The Pacer US Cash Cows 100 ETF (symbol COWZ) has been added to your investment portfolio along with some individual companies that I believe offer compelling value that fits this theme.

US Small Cap Companies:  Smaller companies tend to be more volatile than large companies, but as a group they have historically offered better investment returns over long periods of time.  The Pacer US Small Cap Cash Cows 100 ETF (symbol CALF) has been added to your portfolio along with some select smaller capitalization companies that offer strong free cash flow, compelling valuations and solid growth prospects.

Int’l Developed Market Companies:  International stocks are currently less expensive than their US counterparts.  This may reflect the higher weight of high-flying technology names in the US indices.  International companies also offer geographic diversification and currency diversification in an uncertain world.  The Pacer Developed Markets International Cash Cows 100 ETF (symbol ICOW) includes international companies with selected for their strong free cash flow and stable dividends.

Emerging Market Companies:  Emerging market stocks are a different animal, so to speak.  Here we want Cheetahs, now Cows.  Emerging market countries are where we were back in the 1950’s.  Here we look for fast growing companies that are best positioned to capitalize on the rapid population growth in the developing world.  The Emerging Markets Internet + eCommerce ETF (symbol EMQQ) and the Columbia Emerging Markets Consumer ETF (symbol ECON) avoid the problem of inefficient “state-owned enterprises” that dominate many broad-based emerging market funds.

Equities:  Natural Resources & Basic Needs

Energy & Materials Companies:  The fossil fuel industry is dying.  Rapid advances in technology and reduced costs are catapulting clean energy companies focused on solar, wind, geothermal and battery technologies into taking their place.  I’ve been exiting all broad-based energy companies relying on fossil fuels in favor of renewable energy ETFs and individual companies that are leading the charge (pun intended).

Food & Farmland Companies: The world’s population is growing – and through good times and bad –– we all have to eat.  I’m now supplementing the two industry ETF stalwarts, VanEck Vectors Agribusiness ETF (symbol MOO) and iShares MSCI Global Agriculture Producers ETF (VEGI) with companies like Farmland Partners which owns 158k acres of farmland and Gladstone Land which owns 88k acres.  I’m also supplementing the broad-based food and farmland ETFs with individual companies including leaders in the plant-based foods revolution such as Kroger, Beyond Meat and rapid growers like United Natural Foods.

Water & Environment Companies: Water is the new oil.  We all take it for granted.  And why not?  We turn a tap and out it comes.  But that’s about to change.  The basic problem is that the quantity of water in the world is finite, but demand everywhere is on the rise.  Water is considered an “axis resource”, meaning it’s the resource that underlies all others.  So, whether you’re building a computer chip, or growing crops, or generating power, all these things require lots of water.  We invest in ETFs like the Invesco S&P Global Water Index ETF, and individual industry-leading companies such as  Veolia , Xylem and Consolidated Water.

Timber Companies:  A unique characteristic of timber companies is that their inventory keeps appreciating in value even during recessions – as their trees continue to grow during good times and bad.  Lumber is also used primarily in the single-family home market, which is booming during the pandemic as people leave high-rise living in cities for work-at-home solutions in the suburbs.  We invest in both iShares Global Timber & Forestry ETF (symbol WOOD), and directly in Weyerhaeuser, the largest landowner in the United States with 12 million acres of timberland under management.

Fixed Income:

Cash & Currencies:  This is our dry powder.  There are times when cash is king even when the yield is next to nothing.  The US dollar has been on a long run versus other countries for more than 20 years.  With the current unprecedented pace of Fed money printing, some believe that that this trend is long in the tooth.  For that reason, and to hedge our bets, we are beginning to include foreign cash in the mix through currency ETFs.  Favorites include the Australian and Canada dollar (commodity currencies) and the Swiss Franc (which has a long history of responsible management of their currency).

US Bonds: Historically the least risky asset class may now be the riskiest of them all.  After 50 years of declining rates (which causes the prices of existing fixed-rate bonds to rise in value), many of us wonder how much lower they can go if at all.  Nonetheless, bonds remain an important diversifier.  We avoid the risk of rising rates by focusing on bonds with short duration, inflation-protected bonds, variable rate bonds, and bond substitutes like new products such as Cambria Tail Risk ETF (TAIL), which invests in a combination of US treasuries and “put options” on the stock market that would rise in value significantly in the event of a sizeable market downturn. 

International Developed Market Bonds:  Our focus here is on currency diversification to reduce the risk of decline in the US dollar and inflation-protection through TIPS purchased from major developed issued by responsible governments including Germany, Spain, the UK, Australia, China and Japan. 

Emerging Market Bonds:  Bonds issued by developing countries offer both currency diversification and high yield.  Today emerging market countries like South Korea, Indonesia, Malaysia, Taiwan and the Philippines often have stronger balance sheets and less debt than many of their developed market counterparts.  These countries have younger populations and better growth prospects than their more highly developed competitors.  In that sense the bonds of these countries may be mispriced, leaving room for significant appreciation in addition to their already high yields. 

Real Assets & Alternative Diversifiers

US Real Estate:  There is something to be said for physical assets that we can feel and touch, and which don’t become obsolete when someone invents new software code, a faster computer chip or better high-tech mousetrap.  Shopping malls and office buildings may be in secular decline, but apartment communities in low tax states, senior housing and datacenters in suburban markets are on the ascendency.  Income-producing real estate provides low risk and solid dividends as long as one doesn’t bet too heavily on particular types and locations.  We are now supplementing broad-based REITs with companies that own senior housing, medical offices, apartment communities in the Sunbelt, distribution warehouses and cloud-based datacenters that are in increasing demand all over the country.  REITs currently produce dividends of 4% to 5%.  Even assuming no appreciation in asset values, this asset class offers solid returns.  Given the tax structure of REITs, we typically hold real estate investments in tax-deferred retirement accounts whenever possible.   

Global Real Estate:  If real estate itself is a good diversifier, owning it globally magnifies the diversifying properties.  Cell towers, data storage facilities, and cloud-based data centers are exploding in demand worldwide.  We own US domiciled REITs that maintain real estate holdings worldwide.  Yields here are even higher than with US properties, averaging 6% to 7% globally. 

Global Infrastructure:  Highways, bridges, and airports make up the bulk of publicly-owned global listed infrastructure, but the fastest growth is coming from the rapid expansion of critical infrastructure that uses smart technologies. Years of dithering and missed opportunities in Washington have forced innovators and investors alike to create their own infrastructure boom. With the economy crying out for stimulus and an election on the horizon, these companies may finally be ready to rebuild the nation and the world.  Regardless of which party wins the US election, it’s a safe bet that we will be heavily investing in rebuilding our infrastructure beginning next year. Rebuilding infrastructure means new jobs and economic growth, which may be sorely needed as we come out of the pandemic and face dislocation in so many service industries.  We are getting ahead of this curve by investing in Global X US Infrastructure Development ETF (symbol PAVE) and SPDR S&P Kensho Intelligent Structures ETF (symbol SIMS).  The former invests in traditional companies that benefit from infrastructure development including railroads, engineering companies, heavy equipment makers and contractors.  The latter focuses on smart building infrastructure, smart grids, intelligent transportation infrastructure and intelligent water infrastructure.  This category could explode upward when Congress and the President get serious about rebuilding our infrastructure and stimulating the American economy in the process.

US Energy Infrastructure:  We’re gradually exiting the oil and gas pipelines that once dominated this category in favor of progressive utilities that have embraced new technologies including solar, wind, nuclear and other non-fossil fuel source of energy.  We remain partially invested in Kinder Morgan, an energy pipeline company that is expected to benefit from consolidation of the remaining US pipeline infrastructure as they gobble up weaker players.  It doesn’t hurt that Richard Kinder, one of the greatest minds in the energy industry, owns 10% of the shares.

Gold & Gold Miners:  The Federal Reserve can print money, but they can’t print gold.  Gold has historically performed well during deflationary periods when fear is high and when low interest rates make the carrying cost low.  Gold also performs well in inflationary periods when confidence in paper money is waning.  Our gold holdings are diversified in vaults throughout the world including London, New York, Frankfurt, Perth, Toronto and Zurich.  We also hold companies that own gold in the ground in the form of the gold miner ETF iShares MSCI Global Gold Miners ETF (symbol RING) and individual gold mining companies such as Newmont (symbol NEM).

Commodities:  Commodities are turning in a solid performance in 2020.  The category includes oil and gas, agricultural products, industrial metals, and precious metals including silver, platinum and palladium – many of which have industrial uses in technologies of the future.  Most importantly, commodities are a tangible real asset that outperforms when the US dollar is weak, as it was for most of 2020 to date.  Commodities are in finite quantity and extraction involves significant costs, offering a thesis for increased scarcity as population growth continues around the world. 

Innovation:  This is the most exciting category to talk about.  It’s all about the future, except that the future is now.  Innovation has persisted throughout the course of history; but it has not always progressed in a predictable or linear fashion.  Innovation is episodic.  Periods when we have seen increases in rapid adoption of new technologies typically coincide with sustained and accelerating economic growth.  I believe that we’re now living through a 4th industrial revolution and that is driving the current pace of innovation in the marketplace.  Building on the 3rd (a digital revolution occurring since the mid-20th century), the 4th reflects many technologies – blurring the lines between physical, digital and biological spheres.  Innovation is everywhere.  It can be found in any part of the economy regardless of sector classification, market capitalization or geographical location.  That’s why I’ve created a space for innovation as a separate asset class.  The companies that are leading this revolution don’t necessarily fit in any of the other 19 categories.  Some of them are small and not yet profitable.  They don’t always appear in other broad market indices.  There are 5 platforms of growth that will generate significant economic value over the next 5 to 10 years:

·        Global E-commerce.  Beyond companies like Amazon and Alibaba – who have penetrated industries like travel, books, household products, groceries, office supplies and media – I see significant opportunities in fashion, autos, travel, ride sharing, restaurant delivery and even textbooks.  There are opportunities in payment companies that are easy to use and add security and safety to the system.  Drone manufacturers and other ways to delivery packages are also potential areas for investment.

·        Genetic breakthroughs.  The genetics industry is on the cusp of creating meaningful advances in diagnostics and therapeutics, and even in areas like agriculture and artificial intelligence applications.  Human longevity and aging may even be manipulated through advances over the next 10 to 15 years.

·        Intelligent machines.  Artificial intelligence or machine learning is permeating every layer of product development. If the past 30 years we spent time collecting and organizing data with mainframes, personal computers and mobile phones.  The next 30 years could be set up to take that data and change our lives in the physical world.  The future of production will include individualized products designed to the needs of the customer.  Efficiencies in the design and manufacturing process, employing robotics, 3D printing, and manipulation of massive amounts of data, will enable that level of specificity and customization.

·        New finance.  Efficient pricing and methods of payment are advancing and being adopted rapidly.  Methods of exchange are evolving with trends in e-commerce, allowing mobile payments and digital wallets to gain traction. This is especially true in developing countries that lack the advantages (or burdens) of a brick-and-mortar banking infrastructure.  In many poor countries, payments by smart phones have already completely replaced paper currencies and the need for bank accounts or credit cards.  FinTech is a merging of finance and technology and rapid adoption is already underway everywhere in the world.

·        Exponential data.  Our ability to collect, store and deliver data to create more efficient marketing and distribution has taken a major leap forward in recent years and is growing exponentially.  That requires massive amounts of datacenters, fiber-optic cable, and cell towers.  Advances in artificial intelligence, computing power and memory are allowing us to fully exploit that data.  The creation, cleaning, storage, and delivery of data will lead to new applications like augmented and virtual reality, artificial intelligence & machine learning, software as a service, and the sharing economy.  Some have postulated that data is becoming the new oil.  I agree.  

We are covering this space through a variety of thematic ETFs focused on the innovators that are changing our world.  These include The SPDR Kensho New Economies ETF  (symbol KOMP), the iShares Exponential Technologies ETF (symbol XT), the ALPS Disruptive Technologies ETF  (symbol DTEC), the ARK Genomic Revolution ETF (symbol ARKG), the iShares Robotics and Artificial Intelligence ETF  (symbol IRBO) and the iShares Cybersecurity and Tech ETF  (symbol (IHAK). 

Hedge Strategies & Macro Trends:  A hedge is a risk management technique to minimize volatility, reduce risk and improve performance.  Hedge funds have historically used complex techniques such as long/short equity strategies, put/write and covered call options strategies, leveraged dividend strategies, merger arbitrage and tail risk management techniques to achieve these objectives.  Other techniques include momentum and macro-trend following strategies designed to exploit market inefficiencies.  We use several well-regarded ETFs to cover this asset class including the Direxion Work from Home ETF (trend following), the AFGiQ US Market Neutral Anti-Beta Fund (long/short equity), Blackrock Enhanced Equity Dividend Trust (leveraged dividend), the Quadratic Interest Rate Volatility and Inflation Hedge ETF  (tail risk), the Global X NASDAQ 100 Covered Call ETF  (options) and the Amplify Transformational Data Sharing ETF (macro-trend) to gain exposure to transformational blockchain trading technology (which goes well beyond crypto-currency applications).

Conclusion:  If you’ve made it this far, you now have an appreciation for how I spend my time.  Roughly half of my time is spent educating myself and applying what I learn to portfolio construction.  The other half is implementation and responding to individual client needs.  My goal is always to help you achieve your goals as articulated in your financial plan.  The strategy is always evolving in an effort to better manage risk and take advantage of new opportunities as they emerge.  New ideas are constantly being considered for introduction to our disciplined investment framework.  The goal is always to minimize risk, reduce volatility and generate strong long-term returns as we work together to achieve your financial goals.  The goal is simple.  The challenge lies in the design, the implementation and the rebalancing discipline.  That’s my job.  One less thing for you to stress about as we move forward together into this Whole New World. 

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Comprehensive Money Management Services LLC
535 Vilabella Avenue
Coral Gables, FL 33146
Phone 305-662-7757
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Comprehensive Money Management Services LLC (“CMMS”) is a Registered Investment Adviser located in Coral Gables, Florida. The firm is registered with the State of Florida Office of Financial Regulation. CMMS and its representatives are in compliance with the current filing requirements imposed upon Florida-registered investment advisers and by those states in which CMMS maintains clients.

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