28 Dec 2018 Outlook, Cryptocurrencies & Bitcoin
Christmas was great, I trust you had a great Christmas as well.
A couple of things about the market. As you know, we have no idea whatsoever what the market will do in 2018. In our opinion, if you find someone that says they do—run. No one we know is any good at short term predictions such as a year and if they existed, they would be smart to keep it to themselves. This means you must operate under uncertainty and the best way we know to do that is to have a systematic approach to the markets and by default-a systematic approach to asset allocation.
As far as we know, there are only three general classes of systematic approaches. One approach is, buy and hold, where you have 100% of your money in the stock market 100% of the time and while doing this to practice either passive or active management. Practitioners of passive management gravitate towards index funds and the rest to active funds or individual stocks. This is an approach we love for those that can stand the risk. The second kind of systematic approach is, static asset allocation, where you allocate X% of your money to one asset class such as stocks and then 1-X% to other assets. This is the approach most of the financial planners we have met recommend. As you know, we think it’s entirely too risky and would never pay for such a low level of expertise. The last approach, the approach we like, dynamic asset allocation, where you vary how much you allocate to stocks and other investments based on some type of model. We gravitate towards this approach because we are convinced that we can mitigate the risks associated with large market losses.
So, what you are asking translates to—what’s your model say is going to happen in 2018. As you know, our model is based on market sentiment. So, what you want to know is what happens if market sentiment changes? The answer is succinct, if sentiment changes, we change with it and act accordingly. Since markets are not characterized by static things such as calendars, we abandoned that school of thought decades ago, we instead measure things on a rolling 250-day basis. This lets us monitor and measure sentiment in a way that allows us to act/trade/reposition at any given future date and allows us to switch back and forth as sentiment changes. What we’re saying is that we use a systematic approach that while it doesn’t tell us what will happen and avoids making forecasts, it tells us what we should do as things happen or as sentiment changes. As my dad likes to say, “We’re in the business of telling people what to do with their fortune, not fortune-telling.”
Nevertheless, it is the season of forecasting and we are not oblivious to the need to peer into the future. We think of it as fun and base 0% of what we do based on forecasts but we do follow some of the best out there and over different time frames. So, if you’re interested the following are sources we respect;
A more realistic outlook is probably in the 7-12 year range.
I’m attaching GMO’s 7-year outlook. gmo-7-year-asset-class-forecast-(november-2017)
Here’s Research Affiliate’s Interactive Asset Allocation 10-year forecast, they update it monthly:
Here’s John Hussman’s 12 year forecast:
The 10 Year US Treasury Bond is paying 2.43%.
You’ll see that the outlook isn’t rosy, but that doesn’t make much of a difference to us and you will find out soon why when we launch the Sera Capital Management Optimism Index, symbol OPTIMISM, with S&P/Dow Jones. There is more to come next month on this.
I hope this answers your first question and feel free to pass this email on to anyone you think will benefit from it.
Second question. As far as cryptocurrencies in general go, I think they’re cool and fun to talk about. I like that Bitcoin has a limited supply of 21MM Bitcoins and I think there is a lot of merit to the blockchain. If these are going to take off and we do move to a digital currency, I could see the Fed bringing in Bitcoin to set up a digital currency for us, but at this point in time who knows. They’re just fun to watch.
Finally, if you want to trade Bitcoin with us, you’ll have to do that at Interactive Brokers. Their account minimum is $10k. As to your third question, I do not recommend going short Bitcoin, though I think that’s a great play for a while. The danger is that you could wake up one day and your account could be wiped out and you may owe money. For example, let’s say you wanted to short GBTC, a Bitcoin ETF. It’s at 2150 right now. If you woke up and the price was at 5000, your $10k would be lost and you’d owe money. Not a good bet. I tell all my clients to stay away from Bitcoin Trading or at least wait 5-10 years until you have a proven approach. Right now, you could make a lot of money, you could also be broke and end up owing money the very next day if you trade from the short side.
I hope this answers your questions.
-Now it’s not the best email, or the most well thought-out, but this should give clients an idea of what I think about these topics for now. The important part is that our client is happy with what we do. That’s what we aim for.
Happy New Year.