May 2019: Go-to-cash mechanism
On last month’s newsletter we asked the question: Can the index (S&P 500) continue higher?
The answer we gave is that we do not know so it best to follow rules and be protected.
Last month our ‘go-to-cash’ mechanism kicked in. Most of our strategies allocated a large chunk to GSY, a short duration ETF which is almost equivalent to holding cash. This was somewhat counter-intuitive as the market reached new highs and the sentiment was positive with SPY at 18% for the year. Subscribers were faced with allocations to GSY that ranged from 37% to 70% of portfolio.
SPY’s performance was -6.3% for May. Our strategies were protected and most did not loose as much. A few had a positive return, including the Maximum Yield strategy(+ 8.6%) and the Top 3 Strategy (+2%). Both these strategies hedged risk by allocating to long term Treasuries, which had an exceptional month (TLT, +6.8%). This did not only protect but also provided a positive return for the month.
Beyond Tariffs: Tech Cold War and hardplay?
There was a new escalation to the U.S. – China relations that crosses beyond tariffs which one may argue is a negotiating tactic or a populist political card. Google’s decision to ban Huawei from future updates of it’s Android operating system points to a possible new schism to tech development. Some believe that Huawei is a threat to U.S national interests as it provides infrastructure (including the upcoming 5G networks) to developing nations as well as Europe. Rather than synergy between countries and companies, a possible ‘cold war’ could ensue as technology becomes entangled to national security issues and sovereign superiority.
To top this, a day before month-end the US administration announced a 5-25% progressive tax on all imports from Mexico, roughly $346 billion in 2018, “until and unless all illegal immigration into the US stops”. Beside the immediate implications to the US and Mexican economy (and the drop in the SP500) it is widely expected that such move will jeopardize the United States-Mexico-Canada trade deal which was already send to legislative bodies of the three partner countries to be signed this summer. At the same time this sends a strong message that the US is willing to play hard as trade talks with governments in China, Japan and the EU are in progress.
In the meantime Europe held elections as each country chose their representatives to the EU parliament. The result was that the two main European parties lost strength as the Greens (in Germany), liberals and nationalist parties (Marine Le Pen in France) gained more seats in the European Parliament. Without going into much detail, this means a more fragmented parliament, more shuffling around, more negotiations as Europeans citizens express their dissatisfaction with the previous two-party majority. Europe seems far from stability and strength. Positive outcomes were a larger than usual turnout as well a clear message from younger Europeans that climate change is important to them. This could eventually translate into EU wide policy and incentive for subsidy and growth of “Green tech”.
Bitcoin and the emergence of #DEFI apps
Bitcoin, on the other hand, is doing very well. After a horrific 2018 that saw Bitcoin falling from it’s high of $19,000 to $3,500 and most altcoins being obliterated at -90%+ , 2019 has been kinder to crypto-enthusiasts. Bitcoin has almost doubled from January reaching $8500. For finance-minded people, like ourselves, 2018 brought about new tools that enable decentralized finance (#DEFI).
DeFi is bank-less borrowing and lending. Other than fundamental disruptions DEFI will bring, there is an immediate effect for savers. Not only can you earn 6% for holding cryptocurrency, some providers give rates above 10% for holding DAI, a stablecoin (albeit an experimental one) that in theory can be redeemed 1:1 for $US. The crypto-winter, as 2018 is refereed to, also brought many advances in infrastructure for holding, securing, hedging and trading large amounts of crypto. These are all pre-requisites for institutional investors to enter the market as well as for crypto-based ETFs to function properly.