How to Invest When the World is in Crisis Mode: Mid-Year 2020 Updates
So, it seemed fitting to revisit everything that’s happened and how I’ve changed my strategies in response.
Amazingly, I haven’t changed that much since January, even though we’ve entered the greatest economic crisis since the Great Depression.
My plan in January was to weight more heavily toward gold and equities, and that has been a smart move so far:
The main differences vs. January are:
- I sold all my U.S. Treasuries and moved the proceeds into gold and silver, with a bit more going into equities.
- I had one large exit on AngelList (Teachable), so I distributed some of the proceeds from that into other categories.
- I’ve purchased hundreds of S&P 500 put options as “disaster insurance.”
- And I’m applying for citizenship elsewhere. I plan to renounce my U.S. citizenship and move everything outside the country.
My current allocation looks like this:
- Equities: 31% [Up 4%]
- Cash & Savings: 22% [Down 4%]
- Gold: 10% [Up 6%]
- Real Estate – Equity in Individual Properties: 7% [Up 1%]
- Real Estate – Senior Secured Loans: 7% [Down 3%]
- Municipal Bonds: 6% [Unchanged]
- Angel Investments: 6% [Unchanged – recording these at historical cost]
- Crypto (Bitcoin, Ethereum, Others): 5% [Up 1%]
- Miscellaneous (Risk Parity Fund): 4% [Unchanged]
- Silver: 3% [Up 3%]
- U.S. Treasuries: 0% [Down 6%]
The overall changes don’t look that significant, so it’s more useful to look at the specific accounts that changed the most:
Changed Account #1: Dumping U.S. Treasuries
In January, one account looked like this:
- Total Stock Market Index: 20%
- Small-Cap Value Index: 20%
- Short-Term U.S. Treasuries: 20%
- Long-Term U.S. Treasuries: 20%
- Physical Gold Trust: 20%
I held the Treasury positions since late 2018 and earned a ~20% return on them.
But I sold everything in Q2 this year and moved to this allocation instead:
- Total Stock Market Index: 25%
- Small-Cap Value Index: 25%
- Physical Gold Trust: 40%
- Physical Silver Trust: 10%
Yields on Treasuries, even 30-year ones, are now below the rate of inflation, so it seemed pointless to keep them.
Yes, there’s still some potential for capital appreciation if the Fed moves to negative rates, but that seems unlikely.
So, with record-low yields and the inability for rates to drop even further, Treasuries seemed unappealing.
Sure, they’ll still “reduce volatility,” but in the current environment, precious metals seem like a much better option for doing that and earning above the rate of inflation.
Changed Account #2: Modest Reallocations
In another account, I planned to allocate 1/3 into gold and split the remaining 2/3 evenly between U.S. Small-Cap Value, Emerging Markets, and Non-U.S. Developed Markets.
But then the equity positions all fell, and gold rose over the past ~6 months.
Rather than rebalancing to the original mix, I decided to keep the equities as-is, add silver, and put a bit more into gold, leaving me with:
- U.S. Small-Cap Value: 16.7%
- Emerging Markets: 16.7%
- Non-U.S. Developed Markets: 16.7%
- Gold: 40.0%
- Silver: 10.0%
The U.S. still has one of the highest CAPE Ratios of all markets worldwide, which means the chances of strong 10-year returns are low.
Just take a look at CAPE Ratios worldwide in December/January vs. May:
In short, the U.S. is still as expensive as ever, while most other countries are as cheap as they were in January, or significantly cheaper.
Also, most other countries are not currently burning down and on the verge of societal collapse, which might provide a slight benefit to business conditions.
Why Fixed Income Will Be Terrible for the Foreseeable Future
I am extremely bearish on all fixed income, but especially government bonds in developed markets.
In real terms, government-bond investors are likely to lose money over the next decade, similar to what happened in the 1940s and 1970s.
Bonds have been in a bull market since the early 1980s, driven by falling interest rates.
But interest rates cannot fall much further, and most governments are printing so much money that inflation will exceed even modest, positive yields on bonds.
Yields on corporate bonds are higher, but by historical standards, they’re still exceptionally low:
The best parallel seems to be the 1940s, when Debt / GDP was even higher than it is now, inflation averaged 5-6% per year, and the Fed used “yield control” to artificially suppress rates.
The Fed buying corporate bonds also scares me because if they ever reverse policies, the entire market could come crashing down.
I can think of only one reason why a retail investor should bother with fixed income: if every other asset performs even worse, and there’s low inflation or outright deflation.
That’s possible, but I’m skeptical that gold/silver, global equities, real estate, and crypto will all post negative returns over the next decade, while bonds will miraculously be neutral or positive.
And yes, I still have some municipal bonds, but that’s because Wealthfront annoyingly only lets you change your “risk score,” but not individual asset allocations.
Inflation vs. Deflation, Gold, and Silver
I often get pushback from people who disagree with my large positions in precious metals.
Their usual argument goes like this:
“People said the same thing about QE 1, 2, and 3, and look what happened! There wasn’t much inflation, and gold prices fell back down to earth in 2013. The same thing will happen this time – asset prices may inflate, but the ‘real economy’ won’t see much inflation.”
My responses to this argument are:
1) I disagree with the premise that “there wasn’t much inflation” in the 2010 – 2019 period. Just look at healthcare and education prices:
Inflation has been here for a while – it’s just not evenly distributed.
If you want a real measure of inflation, look at the growth in the money supply over the past ~10 years, and you’ll see the story: average growth of 5-6% per year before it spiked in 2020.
2) This time is different because the government is distributing money directly to people. That did not happen with QE 1, 2, or 3 – the new money went onto banks’ Balance Sheets.
This point still doesn’t mean we’ll see general inflation in CPI or other metrics.
My guess is that inflation will become even more unevenly distributed, with significant increases in some areas, no changes in others, and deflation in others.
3) An expectation of higher inflation is not the only reason to buy precious metals.
Some people argue that the U.S. government will inflate its way out of its massive Debt balance, and others argue that it will raise taxes or “cancel” Social Security and Medicare.
But I believe there’s another possibility: French Revolution 2.0.
The Fed’s actions since the start of the crisis have made wealth and income inequality in the country even worse.
Past a certain point, economic inequality will get so bad that people will start destroying companies and beheading the wealthy in the streets.
If that seems far-fetched, protesters have already set up a guillotine outside Jeff Bezos’ mansion in DC.
Put Options for Hedging “Tail Risk”
OK, now back to investing for a bit.
Sophisticated hedge funds like Universa buy far out-of-the-money put options on stocks to mitigate risk and reduce the “volatility tax” from the negative compounding of large losses.
I am just a retail investor with a tiny fraction of their capital, but I’m now using a similar strategy to hedge against the risk of another big drop in the S&P 500.
Specifically, I’ve purchased hundreds of put options rather than outright shorting the index:
- Exercise Prices: Range from 1500 to 2500.
- Expiration Date: Dec 2022.
The rationale is:
- Not only will there be a second wave of the virus, but the first wave is still ramping up in many parts of the U.S., with lockdowns to follow because people are too stupid to wear masks.
- The FAANG companies will face some serious headwinds in the next few years, driven by government regulation and possible breakups.
- Even if the Fed intervenes massively once again, there’s no guarantee that it will “work” if there are serious fundamental issues, such as a civil war that kills 50 million people.
Other Major Changes: Reducing U.S. Equities Exposure and Buying More Crypto
Overall, I still have too much exposure to U.S. equities, especially in retirement accounts.
I want to reduce my exposure to a maximum of 1/3 of total equities, so I plan to reallocate some of these accounts.
I also plan to increase my crypto holdings to ~10% of my total portfolio, but I’m holding off for now because I waited too long to buy Bitcoin after its price dropped earlier in the year.
There’s one problem with both of these plans, though: all my accounts are still based in the U.S., and that is now a risky proposition.
The best strategy is to maintain accounts in different countries in different currencies.
But FATCA makes that incredibly annoying (some international banks won’t even open accounts for U.S. citizens, etc.).
There is one solution to that problem:
Renouncing U.S. Citizenship
I’m seriously considering renouncing my U.S. citizenship because I think the country is headed for 3rd world status, if it’s not already there.
The government is a joke, full of ineffective idiots who can’t govern, make meaningful changes, or stop cities from burning down.
If you thought the country had some special status before, the virus crisis should have opened your eyes: it’s now the laughingstock of the world.
I haven’t really “lived there” in nearly a decade, and I feel like an idiot paying federal income taxes in exchange for absolutely nothing.
So, I’m applying for citizenship in an EU country, and I’m also considering New Zealand or Singapore via investor visas.
Smaller countries govern more effectively, and citizens of those countries get something in exchange for their taxes: healthcare, infrastructure, a university system that works for non-billionaires, etc.
Strong Opinions, Weakly Held
To be clear: nothing in this article is “investment advice.” These are my personal views, backed up with a bit of data.
And I’m always open to changing my mind if new evidence or better arguments present themselves.
So, I’m curious to hear what you think about these points:
- Are you also bullish on precious metals, or have I gone crazy?
- Will the S&P 500 crash again, or am I delusional with the put options?
- Should individual investors bother with fixed income in the current environment?
- Finally, am I overly bearish on my views for the U.S.? Does it have some upside that I’m not seeing? Or, do you agree but cannot leave for various reasons?
In particular, if you’re an international student, I’m very curious about why you’d pay full tuition for Zoom classes in a country that’s also on the brink…
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