Going forward, we plan for these reports to review the macro environment and market trends that are shaping the way we position the portfolio, and to provide insight into the micro drivers of portfolio performance and tactical allocation decisions. But in this very first issue, we would like to introduce our portfolio management philosophy and the areas of investment we have targeted for initial positioning.
Please remember, when investing, your capitalis at risk.
Let us start with scope. The Pynk Thesis Portfolio (PTP) is a go-anywhere portfolio, meaning we will invest in stocks, bonds, commodities, real estate, precious metals, currencies, streaming and royalty investments, and any and all potential sources of return, but we will do so via the ownership of stocks, closed-ended funds, ETFs, and such stock exchange listed vehicles. We do it this way to address the desire for liquidity and high-quality financial disclosure in the assets we own, as required of listed securities.
But as a go anywhere portfolio, we are somewhat unconventional in the sense that we offer no particular benchmark against which to compare our performance. We cannot say you should compare us to say a 60/40 stock and bond portfolio or to the S&P 500, because our investments will be diverse and unlike any major index. At a time when popular indices have attracted an increasing share of investor cash inflows, we believe they have not only become expensive but subject to outsized risk if and when the world tries to exit a popular index all at the same time.
Our approach is to identify independent areas of the markets that offer the potential to make an attractive profit, over a three-to-five-year period typically. We call these investments “thesis” investments because in each case we look for a particular set of conditions to exist, which logically may be expected to lead to the investment achieving our target return.
The conditions are simple enough.
1) That we see the investment as being presently under valued either because it is simply out of favor or because we believe the market has not properly discounted the unfolding macro environment and the degree to which it will beneficially affect investment performance,
2) That we project a future environment, which will lead to strong financial performance and a new appreciation of its merits, and
3) That (a) the market scenario(s) that we project are highly probable, and (b) that if they come to pass, we can expect to at least double the value of our investment over a three-to-five-year period.
If these conditions do not exist, we will not invest. And if they did exist at one time but no longer do, then we will exit the investment.
It is very important that we can identify clear evidence in determining whether all three of these conditions are met, so that we can monitor macro and market conditions to determine whether the Thesis is still in force. The assumptions must explain why the investment is undervalued, why it's fortunes can be expected to improve and what catalysts exist to make that happen, and finally why we are confident about the return potential to meet or beat our objective. We will provide an illustration a little further below.
So, what should you expect in the way of performance? Well, doubling your money every three to five years offers a return of at least 15% per annum compounded. Of course, there is no guarantee that each Thesis will meet its objective, and investors must be prepared for market downturns. But that is also why we target beating the objective. Of course, the three-to-five-year projected investment period is uncertain and returns during interim periods along the way may vary from the target even if we reach our objective in the end. And beware, there is no guarantee the market will always offer us such attractive opportunities, nor that it will move in our favour.
The keys to this strategy are diligence and patience. If you ask them, investors with the best long term (i.e. consistently good) track records will tell you that the key to their success was consistent, disciplined analysis, and a willingness to dig deep to uncover the truth. We believe that equally important is the patience to stalk many investments but to buy them only when their prices offer the return we arelooking for. Sometimes this means we will miss opportunities we refuse to chase, but the market is inherently dynamic and new opportunities always come along. Patience also means that at times we will carry large amounts of cash, waiting for prices to move into the attractive zone. It is important to be comfortable with that. Remember that cash is often at or near the top of the performance league table, meaning that it outperforms stocks, bonds, and other major asset classes, and we think that in the current environment, that is quite likely again in the coming period.
Let’s just discuss one quick Thesis example and then move on to the positioning of the current portfolio. The example we will use is what we call our Old School Energy Thesis. Back in the early spring of 2020, OPEC members Saudi Arabia and Russia got into a disagreement, and long story short, Saudi Arabia opened the supply flood gates, allowing prices to fall. Almost immediately afterwards the pandemic we are now living through commenced, reducing demand and the one-two punch decimated the oil price. WTI futures famously went briefly negative, reflecting the lack of storage available for those who were long futures to take delivery. Oil stocks crashed along with markets generally.
But oil is not just any commodity. It is arguably the most important commodity in the world, and the price history has plenty of examples of such downspikes in the past, albeit under different circumstances. After bouncing up from the bottom to the 20’s, the oil price was at a level where Saudi Arabia could pump it at a profit, but it was far from the level necessary to meet its budget requirements. For Russia, the initial bounce price was not even enough to be profitable, and again oil revenues make up more than 50% of its budget. In the end, prices must rise for the suppliers to meet their needs, and they control supply. And the long history of oil prices shows that it rarely takes as long as even two years after a substantial drop, to recover.
So how can you capitalize on this? You could simply buy an ETF holding oil futures or a basket of oil stocks and wait for prices to recover. Oil futures have a built-in problem that the market is normally in contango (meaning the further out you go, the more expensive the futures price) so there is a substantial carry cost to roll the futures over long periods of time. And many oil stocks were highly leveraged after years of borrowing and a long period of low prices, so weak cash flow was likely to kill many of them.
This would naturally lead you to the oil supermajors like Exxon Mobil, Chevron, BP, Royal Ducth Shell, and the like. These companies have the resources and the borrowing ability to weather a storm like this. If you do not mind watching lousy earnings roll in for a couple of years, oil should recover, and the stocks, which had been hammered, should recover, and we should beat our return benchmark.
But we saw an even greater benefit of the supermajors. In the fall of 2019, Chevron bid for Anadarko Petroleum and lost out to Occidental who paid $38bn for the company. Suddenly in March of 2020, the combined Occidental/Anadarko was trading for less than Anadrako was before the collapse. In other words, there were likely to be distressed assets available for the supermajors to buy at great prices. They could benefit from the dislocation in the industry.
Another important factor is the shale patch in the United States, which had been the main source of supply growth for some yearsand had led to the U.S. becoming energy independent. Many of those shale companies had taken on massive amounts of debt courtesy of one of the most inviting bond markets for borrowers of all time. Their oil price break even varies but wasn’t much below prices prevailing before the collapse and they were certainly now well underwater in many cases. With a lack of storage, they couldn’t even keep all the wells open and had to shut many. Reopening wells is a tricky business. Wells in the later stages of their lives will probably not reopen at all, and many others will suffer reserve losses because of the closing and reopening process.
In short, there was the real possibility that when the smoke had cleared, supply from the shales was likely to be reduced, which would presumably be supportive of prices higher even than before the drop. And there was much evidence already before the collapse that many of the shale plays were likely to suffer large supply drop-offs, given where they were in their reserve lives. And higher prices would be very good for the surviving companies.
So, we had the prospect of (a) a recovery of oil prices within two years and a corresponding recovery of stock prices of oil companies, (b) an additional return from the supermajors being able to capitalize on the distress of the smaller players, and (c) the possibility of a further boost to returns from higher oil prices than those that prevailed before the collapse.
On top of all of that, the oil sector had become heavily out of favor with the rise in excitement around tech stocks. In 1980, the energy sector made up around 40% of the S&P 500. By ten years ago, it had fallen to around 10%, and today it sits at not much above 2%. These stocks are out of favour, and there is room for a re-rating to the upside. In fact, the average dividend yield across the supermajors is still in the high single digits, which means we would collect half of our benchmark return, just assuming there were no further dividend cuts.
And since then, we have seen what we expected to see. A year later the oil price is back over $50, and Wall Street is talking about $65 soon. And the stock prices are doing very well, suddenly the flavor of the month. Not only has the oil price confirmed our thesis, but we have seen the supermajors make very attractive acquisitions, again confirming our thesis assumptions.
We believe the Oil Supermajors Thesis still has ways to run. The oil price has further to go and the stocks are only just starting to attract the kind of institutional change of heart we expected to see in due course. In fact, this thesis is a beneficiary to some degree of the broader view we have about future inflation.
But enough about that thesis. Hopefully, it served as an example of how we build a Thesis and how we can monitor it.
So now let us have a look at the other theses we plan to launch with later this month or early next month, and after that, we will discuss our macro and market views and why we think so highly of these Theses.
Holding cash for opportunistic deployment
This is our “cash” allocation, at this time executed via ETFs holding short-dated T-Bills. That selection, as opposed to longer duration sovereigns or corporate money market instruments is a choice about safety in the current environment. Yields will be ultra-low but currently positive after fees. There are no foreign currency allocations in this bucket as that is a bet in itself relative to our currency of reference, the dollar.
Allocation to this Thesis is unbounded at the top as it is a residual allocation. Currently the allocation is expected to be well above average, as we anticipate that cash will be among the very top performers in the coming period.
Capitalizing on disruption, undervaluation, and rising prices in the traditional energy markets
The focus in this thesis is the oil sector. Despite efforts to gradually reduce its use, oil remains by far the most important commodity in the world, and it is no exaggeration to say the world economy is still reliant on it.
Oil prices got smashed in early 2020 by a combination of a mistimed supply dispute between Saudi Arabia and Russia and the crushing of demand by the pandemic. Oil has recovered a good part of its prior price level but the destruction to the industry has been significant.
The US shale plays, the most important source of new demand in recent years, may only partially recover, as they were over leveraged going into the problems and had to shut wells during the pandemic, which may not reopen.
We believe the oil price will fully recover and then some, perhaps a lot more, as the world economy recovers, since OPEC suppliers need higher prices, and since the unconventional suppliers may not recover to former levels.
Among the beneficiaries of the problems in the industry are the oil supermajors, which have the strength to weather the difficulties, and the resources to take advantage by acquiring distressed assets at low prices. Many of the smaller players are much weakened.
Benefiting from the devaluation of money via gold & silver
Ever since the end of the gold standard in 1971, governments have been able to print money at will, and they have done so, in some instances, with abandon. Gold and silver, as the legacy form of independent money, have risen accordingly. Gold is among the most widely traded forms ofmoney in the world to this day, and a key reserve asset of central banks, which hold it both for trade and in case of a currency crisis.
Since 2008 and especially during the pandemic, money printing went almost vertical. Many major world governments finances are, by their own reckoning, on an unsustainable path, which if not corrected may lead to massive inflation or worse.
Gold is the hedge par excellence for that scenario and its price has reacted accordingly, handily outperforming most assets so far this century. Our expectation is a continued rise, and this thesis bucket also represents a form of insurance against all the financial assets held elsewhere in the portfolio.
Riding the wave of EVs, renewable energy, and efficient food supply
Notwithstanding the increasing fascination with all things digital and virtual, the human condition is a physical one, and we need base metals to build our cars, battery, and specialty metals to support new industries like electric vehicles and renewable energy, grains to feed ourselves, soft commodities to make our clothing, and bricks and mortar to build our homes.
As a result of a sharp rise in stocks, bonds, and other financial assets, commodities are more undervalued relatively than at any other time in acentury. There have been three other major low points like this over the past 100 years and in every case, they were followed by delightful bull markets that went on for some years.
We believe now is the time to invest here, and the money printing of late, with the consequent possibility of inflation, may make for a double whammy. We plan to invest not only in copper and silver, the beneficiaries of everything electronic, but in the beneficiaries of the anticipated growth in batteries, EVs, and renewable energy. It can take a decade to find and permit a new mine, and current forecasts are that existing supplies may be insufficient to meet our planned needs.
We believe the companies that produce basic stuff will do well.
Focus on Emerging Market Equities that benefit from stronger local currencies, rising living standards,and higher growth.
The past decade has been a good one for the dollar and US assets generally. But outperformance is always followed at some point by underperformance, and US markets are relatively overvalued. In particular, the dollar looks vulnerable for a variety of reasons, including the massive money printing in the US and its stretched fiscal and trade situation.
Just as emerging markets have struggled in the past with a strong dollar, they benefit from a weaker one. They must use dollars for international trade and so they have dollar debts, which are lessened by a weaker dollar. They are also often commodity exporters, and such prices benefit from a weaker dollar (since virtually all international commodities are currently priced and traded in U.S. dollars).
Many of the smaller Asian and Latin American countries will foreseeably benefit, as will some of the larger ones, like India. On top of that, they have generally fastere conomic growth than their developed rivals and are currently cheaper than usual.
We will acquire a portfolio of the most promising and well placed among them, in our opinion, where we believe there is good investment value.
Playing deregulation in the high growth cannabis & hemp market
Cannabis and hemp have been acquiring increasing legal status in countries around the world. In the US, many states havele galized it, but it remains difficult to do business while it is prohibited by federal regulation. We expect this will change this year, ushering in some growth in the market.
Companies positioned to take advantage started popping up a few years back, and like early bitcoin, went vertical and then collapsed, as their prices had outstripped the reality of a market that hadn’t yet become fully functional. The stocks have started to move again now to properly reflect the new reality.
There are many ways to play this theme, by investing in producers, distributors, and the companies that service the industry.
Investing in the move towards the virtual world of work, life, and play
Over the last few years, we have seen a sustained increase in the level of global interest, and investment, into gaming and virtual reality. With the number of real-world applications available to augmented and virtual reality, we expect the positive trend to continue and for this space to grow considerably.
We have seen a lot of short-term growth in several beneficiaries from the boom in gaming and streaming over the last year and expect that to continue as society shifts towards a post-COVID world. There are more and more players in the space, offering ongoing evolutions in gaming and the impacts of those developments will see a sustained level of interest from users and investors.
Playing this theme requires faith in a simple principle: people like gaming, and the VR/AR revolution has only just begun.
Investing in solutions to global warming
Capitalism exists to make money by solving problems and there is hardly a better example than the problem of global warming. While politicians’ debate, companies have been delivering. Solar panels, wind turbines, electric cars, charging stations, storage batteries, hydrogen fuel cells, smart homes, and even smart electric grids.
2020 saw some of the greatest investment gains of all time and particularly in this sector. From companies like Tesla to Sunrun, the gains have been stunning. And companies like Zoom have benefited from the (unexpectedly quick admittedly) move to substitute video for travel. The sector also offers some of the best opportunities for low-risk income in the form of solar and wind energy farms.
After the action of 2020, caution is required, but opportunities abound, and this sector will be a big beneficiary of investor capital and government largesse in the coming years.
Focus on safety and value.
By almost every measure, financial markets are pricier now than they have ever been. But underneath the market averages, the action has been extremely uneven. Tech stocks, junk bonds, IPOs and crypto are off the charts but many of the strongest, safest, most predictable, and defensive companies are trading with high dividend yields and modest valuations relative to their growth prospects.
We’re talking about large companies in healthcare, telecoms, food and beverages, and even electric utilities, offering 5%+ dividends. And at these prices, there is potential for capital gains and a general rerating against the current market leaders.
A basic tenet of market success is the adage that good things happen to cheap stocks. And this low volatility sector of the market represents a nice hedge against the frantic action elsewhere.
Focus on building small, longer term positions in high conviction companies.
No company is a sure thing, but some companies have unique positions ingrowth industries that give them the possibility of outsized gains over the long term. Examples include companies like Qualcomm that own the patents that make the cell phone world run and collect a toll almost every time a phone is sold, or Crispr Therapeutics that figured out how to cut and paste the building blocks of genetic life, leading to a Nobel prize of late. But also, there are smaller companies in emerging industries with unique competitive advantages.
We intend to use our Crowd to identify such companies and to slowly, and opportunistically, build positions over time when prices are attractive.
Uncovering sizeable hidden assets
Investing in the stock market is a way to participate in the growth of the economy, and especially the prosperity creation process that turns invention into application.
But the market is notoriously inefficient at a micro level. One reason for this inefficiency is that there are companies that sometimes hold assets that are not necessarily even in their main line of business, which currently do not generate much revenue and of which the market is largely unaware.
For the diligent stock analyst, these Rembrandts in the Attic can represent a near term windfall when they are sold or put into use.
We have tried to uncover just such stocks and aim to build a portfolio as we potentially uncover further opportunities.
Inspired by Warren Buffet& Charlie Munger. Focus on companies with economic moats, first class management, and attractive growth prospects.
Warren Buffet and Charlie Munger built one of the most successful investment track records of all time by sticking to the very simple notion that well run companies with highly defensive competitive positions will do we llover the long term. They especially like companies that have modest requirements for capital expenditures and plenty of free cash flow.
We believe exactly such companies are available today at discounts to the broader market because they do not have the flash that today’s investor has recently been looking for. Thus, it is a good time to build a portfolio of such positions.
Rather than gambling on striking gold, we will invest in those who sell shovels to the prospectors instead.
It was famously said of the California gold rush of the 1840’s, that most prospectors did not strike it rich, but the folks that sold them the picks and shovels they needed did just fine. Plus of course the saloons, the general stores, the barber shops, and everyone else who supplied an industry that was growing fast.
It is sometimes easier to spot a growth industry than to determine who the winners and losers will be, especially early on. But the picks and shovels strategy is a nice way to benefit with greater certainty.
An example is the fast-growing Cannabis industry where some of the service providers are performing very well and they have a lot less competition than the producers themselves.
Capitalizing on short term market opportunities as a result of unexpected events
Sometimes an opportunity just shows up, more because the price moved than because the fundamentals changed. The stock market is notoriously fickle. Such opportunities are not buy and hold but rather buy and wait for a market change of heart, and when it comes, you must exit.
Other short-term opportunities arise because of temporary conditions. For example, companies selling masks and hand sanitizer right now are doing well but the opportunity, hopefully, may not last forever.
The Thesis portfolio is generally focused on longer term plays because the best niche bull markets usually take some years to play out, but we are not above capitalizing on temporarily mispriced assets when the return is very high relative to the risk.
Where to begin! This is one of the most volatile periods in quite some time for both the world economy and the markets generally. The political landscape feels like the period of just over a century ago leading up to the first world war. The economy feels like the early part of the great depression, just after the crash of ‘29 - you can’t actually see breadlines but a seventh of the U.S. population is on food stamp assistance. And the market feels like something we’ve never quite witnessed before - they sport the valuation levels of the great bull market tops of 1929, 1966, and 2000 but the underlying mood, while clearly euphoric about future returns, feels like a game of musical chairs; there is a palpable sense that the underlying fundamentals just don’t support this market level and the question is how long can this go on for?
Of course everyone is well aware that it is central bank and government largesse that has led the markets higher since they started printing money in earnest after the panic of ‘08 and have continued almost vertically during the pandemic.
But anyone who reads the Congressional Budget Office (CBO) reports or the annual accounts issued by the General Accountability Office (GAO) understands that the U.S. government itself is in trouble. In the GAAP statements they started printing some 20 years ago, the US government routinely receives a qualified opinion for lack of proper controls, and the “unsustainable” path (to use the GAO’s choice of adjective) the government's finances were on in the report they released just before the pandemic began, suggested a level of government debt by 2030, which we will probably now reach by next year if not this year.
Not to focus too much on the United States, the situation elsewhere isn’t much better. While the U.S. has accumulated a debt to GDP ratio of well over 100%,Japan is approaching 250%. Interest rates in Yen are zero out to ten years and the government has taken over the bond market and a large part of the stock market. In Europe, many governments can borrow even beyond ten years at negative rates, and Germany issued a negative yielding 30year bond. Much of what we see makes no sense, but in particular negative interest rates can only be described as an abomination. Even once proper Switzerland sold half of their gold and have ballooned one of the largest central bank balance sheets in the world, literally printing money and using it to buy Apple stock.
So to sum it up: the bond market is, almost beyond a doubt, in a gigantic bubble of historic proportions; by practically every measure in use, the stock market is at all time valuation highs; of other bubbles abound from junk bonds to crypto. But it certainly does look like it just wants to keep going up, and there is a confidence that the central banks will not let things get out of hand, at least not soon. So where does all of that leave the prudential investor?
Well there really is no question that looking out over the longer term, say ten years, compound returns from owning the market averages will be well below historical averages if you get in today. In the aftermath of the 2000 top, the Nasdaq fell 80% in the first two years and you weren’t back to breakeven until 2015. After the 1966 top at 1000 on the Dow Jones Industrials, it took until 1982 to break even, but that is in nominal terms. That was a period of high inflation, and to break even from the 1966 top, adjusted for inflation, you had to wait all the way until 1995. To draw from the title of Reinhart & Rogoff’s “Eight centuries of financial folly”: This time will not be different. And this time valuations are even higher than on those occasions.
But there is good news! Below the surface where the $2 trillion FAANGstocks live, is a world of pockets of sanity. For example, commodities are beginning to wake up, some like iron ore and lumber are on fire, but in aggregate they are a relative bargain. Compared to stocks generally, relative valuations today are at hundred year lows. There have been only three times in the last century when they were even close to these lows: in 1929, 1979, and 1999. And in each case, they did very well in the ensuing years. Value stocks also are in many cases very fairly priced. Hordes of large, stable, household-name companies in the most defensive sectors like electric utilities, consumer staples, telecoms, and healthcare are trading at modest P/E ratios relative to growth prospects and sport mid-single digit or higher dividend yields - at a time when interest rates are zero!
In fact, among the sectors we like there are plenty of things worth buying. Some of the areas we like are of course caught up in the spring-break bacchanalia. Many renewable energy stocks from solar panel firms to hydrogen plays have gone up ten or even twenty-fold in six to twelvemonths. Those we will have to watch for when they come down to earth, if ever. But consider the companies mining for the base metals that will be needed to supply what is projected to be a gigantic growth industry in EVs and batteries over the next ten years. According to sources such as the EU, the demand for everything from lithium to nickel will be astronomical. Where will the supply come from to meet this demand? It takes as long as ten years to find and permit a new copper mine.
And there are many more such plays which seem to be off the Robinhood radar, at least so far. Consider nuclear power. Uranium prices are only just rising off the floor after a long bear market. It’s so bad that much production is closed and many of the small companies can’t produce at a profit. There have been two great Uranium bull markets in the last 20 years and we are probably entering another. But what if this time, the powers that be recognized that uranium is really the only cheap, fast, emission free way to vastly reduce fossil fuel usage?
So the good news is that we have been able to identify many attractive Thesis investments, as you can see from the long list in the prior section. The bad news is that we are sitting on top of the San Andreas fault, figuratively speaking. Even though our foundation will be built to survive, when the big one comes, we will not be entirely immune. Our best guess is that given the high yields and defensive characteristics of the portfolio, we should drop more modestly and bounce back quickly, but even when your building survives the quake, if the neighbourhood gets roughed up, it affects everyone. For that reason, we also intend to deploy our assets at a measured rate, maintaining quite high cash levels initially, and keeping them above average for some time. Cash offers not only protection from down markets, but the ability to take advantage of them by buying at lower prices.
But if you look back at any chart of the stock market over the longer term, the 1987 style crashes appear as blips from the vantage point of today. The market offers a chance to participate in the growth of the economy, in the process of converting invention into productivity, and driving prosperity. It is inherently a game where the player with the longest view is at an advantage. In the medium term a 70/30 stock/cash portfolio often beats the 100% stock portfolio for the simple reason that it forces you to rebalance - when stocks rise, you sell some, when they fall, you buy some. That is generally a good thing. But in the much longer run, buy and hold has won out because stocks have generally outperformed bonds and cash. But no one lives in the very long run. The simple alternative that any investor can apply is to make regular, periodic increases of cash into your portfolio. That tends to balance out the market volatility.
Now let’s discuss our macro view for the coming period. But first, we should note that whatever the view, we can be wrong and we can be early, which is almost the same, so you have to construct a portfolio for multiple scenarios.
But here is our general expectation. After the 2008 recession, central banks entered what we think will become a permanent phase of easy money. The reason is simple. By suppressing rates, they caused debt to grow, which requires them to suppress rates further. They have painted themselves into a corner at this point. The finances of most developed economies would not withstand a rise in rates to anything like normal levels.
But that obviously is a plan which, if unchecked, can only end in disaster, and at least some of them understand that, so how will they escape? Inflation of course. They haven’t had much luck with that of late so how will they engineer it? Helicopter money. What they realized during the pandemic is that they don’t just have to increase money to suppress rates, they can increase money to directly goose the economy by handing it out to individuals and businesses. And most likely that is what they will continue to do. You might ask, how can anyone be certain it will work? Imagine for a moment the government dropped sacksful of money over every neighbourhood in the country tomorrow. Do you think prices would rise? That appears to be the plan.
There is a lot of evidence that the low double-digit money growth rates of the last decade have led to a similar growth in prices over the period, but that that growth in prices is just not being captured by government statisticians, who have every incentive to suppress reported inflation. But money growth in 2020 is literally off the charts and there is every reason to think this will continue. If it does, we will most likely get inflation. We may even get decent economy for a while as a result of all this helicopter money, although the concomitant debt will eventually come home to roost, but inflation will, most likely, be upon us.
The millennial generation, the largest in thus., have not experienced inflation – it’s been about 2% on average since2000, the lowest such 20 year average since the end of Bretton Woods. If and when they do, there will be a shift in the zeitgeist from the current “reach for yield” to a “reach for a real, tangible asset that will rise with inflation.” Under those circumstances, precious metals, commodities and other real assets should do well.
A related factor we believe will be continuation of the weakness in the dollar we saw this year, likely to newbuilt decade lows in due course. The dollar has always been a haven in a storm, and another such rally is surely possible but we believe the medium term spells dollar weakness. The dollar has been both a blessing and a curse for its issuer. The curse has been the need to tolerate permanent trade deficits (since everyone needs dollars)and the consequent offshoring of the U.S. manufacturing base. With the U.S. at about 25% of world GDP and maybe 15% on a purchasing power parity basis, and the dollar representing around 80% of world trade and 65% of central bank reserves, the situation is out of balance. We’ve had two major worldwide monetary systems since the second world war, the adoption of the Bretton Woods international gold standard of fixed exchange rates in 1944 and the switch to the petrodollar system when we left the gold standard in 1971. No one knows when the next switch will come but in the meantime the dollar will very likely weaken. And that is good not only for precious metals and commodities but also for emerging markets, which have large dollar debts and often are commodity exporters too.
Along with dollar weakness will most likely come underperformance by dollar markets, simply because they have become relatively overvalued compared with much of the rest of the world.
These trends are very supportive of the Thesis Portfolio as we plan to launch it. Of course, the weak economy and the great debt overhang may delay the trends we expect but we believe that the sectors we are targeting will see at the very least a beneficial rotation as the pandemic economy recovers and investors look for undervalued sectors - we are already seeing signs of the latter. In the end, our greatest hedge is our cash position: the worst case for the portfolio, and all portfolios, is a major downdraft that takes everything with it, and this is far from impossible - in such a case the one and only performer will be cash, which will not only support returns but also will provide the optionality to capitalize on the downturn – to buy at attractive prices .
By the time you receive the February issue of the monthly report, we hope to have have launched the portfolio and look forward to discussing its performance along with the unfolding macro themes and some details on the theses we are focused on.
Best wishes for a good start to the new year!
When investing, your capital is at risk and you may recover less than the initial investment.