April 2018, Chicken Little Portfolio Performance

The coming great financial storm may be upon us. In the past, I have focused on the probability and characteristics of the coming Financial Depression (e.g., "there will be a massive, historic drop in price for all risk assets"). In this post, I focus on the process of the decline, and the barrier you will face in saving yourself and your family. 

The Great Financial Storm Looms

This post has three parts:

1. April 2018 performance
2. A prediction of the Process of this Depression
3. How you could save yourself and the barrier you will face.

1. April 2018 performance

In April 2018, the Chicken Little Portfolio lost 1.27%  while the Dow Jones Industrial Average gained 0.11%. 

Apr 2018YTD 2018
Chicken Little-1.27%-2.59%
Dow Jones Industrials0.11%-1.80%

So far, 2018 has been challenging for investors as all broad asset classes have struggled. 

AssetSymbolApr 2018YTD 2018
Dow Jones IndustrialsDIA0.11%-1.80%
Non-US StocksEFA1.52%0.61%
Emerging Market StocksEEM-2.82%-0.42%
US Long-Term BondsTLT-2.30%-5.74%

2. The Process that will lead to Depression

We are in the early stages of dealing with a debt crisis. The world has been though hundreds of debt crises, and they follow similar courses. In the case of the US in 2018, individuals will begin to cut back on expenditures. People need to repay debts, and they will not be bailed out by the stock market. Conspicuous consumption will morph into embracing frugality. 

Your Future is Frugality

Frugality by individuals will lead businesses to cut investment. Why build a restaurant when people are shopping at Costco and cooking at home? This negative process spirals downward as frugality begets business cuts, which begets more frugality. 

Just as debt crises have happened throughout history, consumers have gone through bouts of frugality over time. One solution to such frugality is for the government to embark on a Keynesian stimulus policy. If people won't spend, then the government can step into the breach and boost the economy. 

The Government built the Hoover Dam in the 1930's

Your uncle Sam can't bail you out because he is so broke he is already borrowing trillions from you. The problem in 2018, however, is that the government may be more broke than individuals. If the government attempts to spend even more money, and run even larger deficits, interest rates will rise and the economy will stall. 

Trillion Dollar Deficits for years to come

3. How to save yourself from the coming Depression

At one level, saving yourself is simple. Sell your risky assets and buy 2-year treasury notes yielding 2.5% You can now earn 2.5% almost risk-free (even Treasuries have some risk as the US government can default or create inflation). 

What is the barrier to saving yourself and your family? The answer is you, or, more politely, human nature. The US stock market is 10% down from its high. It is very hard for most people to sell today for less than they could have sold for recently. 

Investment is psychological 

A second barrier is fear of missing the bounce. In the past, all US stock market dips have turned into buying opportunities. I believe the current dip is not a buying opportunity

Thus, even if you know that you should reduce your level of financial risk, it is very hard to make the changes because of internal psychological barriers. 

May 2018 portfolio positions

Chicken Little is prepared for a deflationary depression by being long US Treasuries with a good amount of cash. Chicken Little has a modest short position in gold. Two changes in the portfolio in the month: 1) completed initial bear market raid, and 2) reduced the short gold position. 

Previous month's report                           Subsequent Month's report

Chicken LittleDow Jones Industrials
2018 (through April)-2.59%-1.80%
2015 (April through Dec)-2.49%-0.27%
since inception (3/31/15)-2.58%45.19%

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