This Week’s Message: Tweaks to Come — And — Reiterating the Case for India

Macro strategists/consultants Raoul Pal and Julien Brigden published their monthly call yesterday. 

Here’s Pal on the current setup (in a nutshell) and how he’s presently hedging:

“There are two fears here, one is the bond market and the other is the real economy, it feels as if something’s got to give.”

I, as you know, concur…

When asked how he’s hedging against a potential equity market selloff, he answered,

“Bond calls and S&P puts.”

I, as you also know, am totally on board with using S&P puts right here as a hedge. However, not so much with going long the bond market with options at this juncture. 

Although the latter will work if we see a deflation-inducing equity market selloff… 

The type of panicky liquidity event we experienced last March, however, took treasury bonds right down with it, as the world dashed for cash. While the S&P puts screamed higher the whole time.

As I’ve hinted recently, we’ve done a bit of tweaking to our core target mix to, in diversified fashion, reflect what we view as the best risk/reward setups going forward. 

Thus, over the next couple of weeks you’ll receive a number of trade confirmations. 

Our first step, when we engage in such a rotation, is to explore the tax ramifications in each non-retirement plan account. If, you investment clients, it’s of consequence beyond what we’ve previously agreed to, you’ll receive a call from me to discuss before we take action.

In a nutshell, we’re continuing to express our longer-term thesis — which reflects what absolutely has to occur for the powers-that-be to circumvent what they are presently deathly, and legitimately, afraid of — a collapse of the debt-heavy edifice they themselves have built underneath the global economy. 

Specifically, for the U.S., that’s a weak dollar and low interest rates virtually as far as the eye can see. It’s also a massive amount of fiscal spending on infrastructure, which includes a serious push toward related eco-friendly endeavors. 

We’re also looking to — at the margin — exploit favorable demographics in emerging markets, as well as the relatively more attractive valuation and dividend income setups found in developed market international equities. 

I devoted volumes to this throughout our 8-part 2020 year-end letter. Each part can be found by scrolling through January 2021 and December 2020 in the righthand margin…

Specifically, in terms of how that looks for our client portfolios:

Our commodities target goes from 23% to 24% of the overall mix, with the addition going to silver.

Our developed non-US exposure goes from 17% to 19%, with the same 60/40 split between Asia and Europe.

Our emerging markets exposure goes from 9% to 10%, with the addition going to India.

Our U.S. equities exposure goes from 33% to 29%. With cuts to (while still maintaining positions in) consumer staples, healthcare and utilities.

The remaining 18% stays in cash and ultra-short-term investment grade corporate bonds. This cushions volatility a bit and maintains some “dry powder” in the event an equity market selloff presents some opportunities to exploit.

Sectors we’re adding to are financials, energy, and materials (miners in particular).

New subsectors within the areas we’re adding to are (at the margin) solar, wind, metals miners, a rare earth minerals miner, and water.

And, yes, we will continue to hedge with options. An absolute must given the present macro setup!

Now, keep in mind, your portfolio has to be of sufficient size to express our entire allocation. Kids/grandkids’ portfolios, for example, express our overall thesis in somewhat modified fashion.

Coincidentally, echoing part of our India thesis (the US/India relationship part) was an article published this morning in Bloomberg titled U.S. Unveils Plan to Counter China’s Rise from India to Taiwan.

Here’s a slice:

“India’s preferred partner on security issues is the United States. The two cooperate to preserve maritime security and counter Chinese influence in South and Southeast Asia and other regions of mutual concern.”

“India remains preeminent in South Asia and takes the leading role in maintaining Indian Ocean security.”

“Accelerate India’s rise and capacity to serve as a net provider of security and Major Defense Partner; solidify an enduring strategic partnership with India underpinned by a strong Indian military.”

“Strengthen the capacity of emerging partners in South Asia, including the Maldives, Bangladesh, and Sri Lanka, to contribute to a free and open order.”

Again, our thinking behind our other tweaks is covered in our year-end letter, and of course we’ll continue to highlight our ongoing analyses herein as the year unfolds.

I’ll leave it here for tonight. 

Thanks for reading!
Marty

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