Reducing Market Risk … Almost Completely

As of this writing, I’ve moved to 85% cash and 15% SLV (Silver ETF) in our conservative client portfolios. I’ve moved to 40% cash, 35% SLV and 15% GDX (Gold Miners Index) in our aggressive client portfolios.

I’ve been an individual investor since the early 1990s, a professional since 2001, and I’ve never seen the kind of disconnect between reality and the stock market I see today. The most similar situation I can remember is the craze in 1999-2000.

I remember I was invested in the hot technology stocks at the time. They were going straight up. The Nasdaq hit 5000, an all-time high. Sue (my wife) and I were on a two-week all-expense-paid trip to Hawaii we received from IBM as a Global Recognition Award for accomplishments in 1999 and 1998. During our time in Hawaii (May 2000), I checked our stock portfolio at Charles Schwab using a dialup-over-the-phone-line modem (no WIFI !) in our hotel. In one week, our portfolio value had dropped 15%!

When we got home, our portfolio had bounced back, but I had seen enough. I wanted no part of the risk of a bear market in stocks, even if I was missing out on more gains. I went to cash in our portfolio and 100% bonds in my IBM 401k. You know what happened next.

I did not know the future then and I don’t know the future now. We are playing the probabilities and the risk vs. reward of staying in or getting out of stocks. The bounce we have experienced from the March 2020 crash lows has been an incredible gift from the Federal Reserve and the $ Trillions it created. Stocks may continue to rise, but the potential reward is not worth taking the risk of another bear market in stocks.

This last week, Mr. Powell at the Federal Reserve announced a policy change. He said words to the effect that the Fed would allow inflation to exceed 2% instead of targeting 2%. He explained that the Fed would be watching for an “average” inflation rate of 2%. What does that mean?

Here are my thoughts:

1. The Fed will not raise rates to stop inflation because they are more afraid of deflation, a market crash, and an economic depression than they are of inflation.

2. If the Fed is more afraid of a deflationary depression, then that must be a real possibility, even though the cost of healthcare, prescriptions, food and shelter are increasing far more than 2%/year.

3. If a deflationary depression is a real possibility, then that is what we will protect against by raising cash. Historically, stocks fall during deflationary times. Bonds don’t look as good to me now as they did 20 years ago… not by a long shot.

4. If the Fed succeeds in creating/allowing inflation to increase, owning precious metals should help us. Historically, stocks perform well in a low inflation environment, but they perform poorly in a high inflation environment.

That concludes my analysis.

Enjoy your weekend with friends and family. Please be safe.