Portfolio management & Amanita performance during high inflation & in the end times
Due to the incredible performance of gold & silver the past 3 months (gains of about +30%) I'd like to discuss the background of the price explosion, including the hardly ever debated topic of choosing the right market strategy in times like these.
The Amanita performance of the past 10 years
- Already in late 2000 a multi-year gold bull market was projected to begin in either early April or early May 2001: the actual beginning was April 2. For many years enthusiastic subscribers thanked me for having called this secular bull market so well, resulting in decent gains... As soon as 2001 the transit of Pluto over the Galactic Center (heliocentric in December 2007) was singled out as the first opportunity for a major high. Indeed, the bear market began in early 2008, entailing a silver crash of -60%.
- Gold & silver have always been the main position in the strategic Amanita investment portfolio since the introduction in 2003, until 2008 with a weight of 30-50% (the other 50-70% spread among different positions). Silver was bought in 2003 not much higher than $4, meanwhile with a ‘subtle' profit of some +1,000% (gold still +400%). Compare that with the S&P 500 which has made some percentage points since 2003, and the most successful market participant on the planet (Warren Buffett) having made less than +100% since 2003. From 2003 through 2006 a large equity position was also held, which was reduced to zero in December 2006, before a bear market began in 2007.
- From late 2008 on the share of the precious metals was increased dramatically. Platinum was first added on 9/30/08, just before the bear market low in October 2008: meanwhile the price of platinum has almost doubled (in US$ terms).
- Gold was increased a lot in the $800s on 4/14/09 (within days of the most important low of the year 2009) - meanwhile the price of gold has more than doubled.
In the fall of 2010 the large precious metals position was raised again because of the expected surge of hard money, to an almost maximum 90% of the portfolio (without leverages). This new position has yielded stellar profits in the meantime, with the price of silver doubling. In normal times you would never allow such a one-sided position, but today this is absolutely necessary.
The two red lines are the 2 scenarios of the December 2010 gold prognosis as published in the „Amanita Investor's Guide", the black line are the prices. We are closely tracking the more bullish scenario, which suggested lows in January & May.
It has been my mantra for 10 years that one should not sell a single grain of the physical metals. However, in the not too distant future we are approaching the first selling opportunity of this bull market...
Portfolio management in the end times
There is not an inch of arbitrariness in the strategic Amanita allocation. A key element is that 7/8 of the capital is strategically fixed, only 1/8 is traded in the tactical Amanita signals. Please note that I can only take responsibility for the Amanita performance exactly as defined by the parameters - everything else is the *own* performance, no longer the Amanita performance.
In the end times the Amanita performance system is defined by 3 main goals:
- 2a performance, 2b risk diversification
Safety is by far the most important today factor, which is fulfilled by the precious metals much better than by all other investments. Performance is hardly more important than diversification. If performance were the only goal, than the tactical trading would have been discontinued altogether, i.e. with a weight of 0.0% instead of 12.5% (1/8). Reason: it is nearly impossible in the end times to beat buy-and-hold gold & silver versus trading (calculated without a leverage in both cases). Of the 3 goals the only reason for the tactical trading is risk diversification. The main goal since 2011 is to position oneself for the time *after* the collapse.
In my opinion today the portfolio priorities are completely different than in normal times, where one should rely on the following order:
- risk diversification
During normal times it's a trivial offense to watch nothing but performance, perhaps taking diversification a little bit into consideration, too - yet safety plays no role. With this laisser-faire approach you have been doing well for the last 60 years, but you might suffer shipwreck soon. This could also be a problem for hardcore gold bugs (i.e. without diversification) - especially the inner diversification (within the precious metals) is now very important.
In light of annual advances of 40-100% in gold & silver I'd like to discuss strategic questions which have been stressed in the protected area for years. Market timing is only useful when markets are not rising more than 15-25%. In monster bull markets rising more than 25% you will lag behind buy-and-hold with a probability bordering on certainty. The more aggressive (e.g. including selling short), the higher the losses compared to buy-and-hold - and possibly even entailing absolute (nominal) losses. The only exception are those who have found the Philosopher's Stone, which means triple-digit gains year after year. As always it's crucial to define realistic goals, with pole vaulting is a good metaphor: setting the bar too high may mean losing everything.
Therefore nominal price action is by far the most important factor in determining the right market strategy. It's bizarre but this factor is of paramount significance, yet almost never discussed. I have been studying performance statistics for a decade & the results are always the same:
odds of outperforming buy-and-hold
bear market: annual loss of at least 10-20%
sideways market: +/-5%
weak bull market: annual advance +10%
normal bull market: annual advance +15%
powerful bull market: annual advance 20-25%
monster bull market: annual advance 30-50%
hyperinflations: annual advance hundreds to millions of percentage point
Current example according to the rating agency „Timer Digest" on 8/29/11: of the 100+ market timers only 8 could significantly beat the benchmark S&P 500 (annual advance +12.4%): this translates into odds of P<8%. Behavioral science tells us that a cardinal problem of the human psyche & thus of market participants is to over-estimate one's capabilities. According to studies only depressives are realistic in their self-assessment - and I suppose spiritually advanced people who no longer need to inflate their egos. The problem of hubris is that it leads to way too optimistic targets & thus too risky actions, deteriorating performance.
This also explains why according to studies the performance of the past 12 months has little or no (!) predictive power for future performance. According to Mark Hulbert, founder & editor of the rating agency „Hulbert's Financial Digest", and other analysts we might even suspect a minor tendency that the top performers of the past 12 months are the underdogs (!) of the coming 12 months (Link)... The reason is that the outperformance of the past 12 months is often the result of risky maneuvers (and of good luck, depending on the horoscope of the decision maker). It's exactly this risk proneness that in turn produces a painful blowback. That's why only 5-10 years of good performance are a reliable indicator for a future good performance. Under the influence of Jupiter & Uranus one might indeed be more aggressive - but under Saturn one ought to be more soft-pedal again.
In full-blown hyperinflations no one is able to beat buy-and-hold (without a leverage), so traditional short- to intermediate-term market timing will always & without exception destroy the capital. A good example is the Bovespa index: in May 1993 it was still at 24 points, in 1994 already at 4,000 points... Trading such an up move can only end in total disaster.
However, these statistics are just the tip of the iceberg: the longer the observation period, the more extreme the odds get. E.g. if the odds of outperforming are P=10% in a normal bull market in a 1-year period, then the probabilities are much lesser over a 5-year observation period, likely P=3-5%...
Excursus: performance from a spiritual point of view
Still, one should put the goal of profit maximization into perspective. For all human beings who are not saints (defined as a level of consciousness of 580+ on the scale of Dr. Hawkins link, odds P<0.1%) it is quite dangerous to make extra-ordinary profits. Why? This may sound totally incomprehensible at first because it likely was never discussed before in a market publication. Too much success often creates a strong attachment to success, as Russian miracle healer Sergey Lazarev has explained in his books (content of truth 80-90%). But all attachments lead away from god, so the High Self (soul) starts to destroy the existence. In other words, to save the soul the physical existence is sacrificed. Lottery winners are good example: the lives of many of them are totally ruined in the years after the lottery win.
Why are the inflation markets so strong? About true inflation
During times of universal deceit, telling the truth becomes a revolutionary act. (George Orwell)
Needless to say, the dramatic rally in gold & silver is a result of the exploding inflation, as precious metals are historically the most important inflation gauge. Unfortunately, it's getting more and more difficult to find good inflation estimates, with all official numbers being massaged. Several years ago I was one of the first to quote John Williams (shadowstats.com). However, the crowd jumped on the bandwagon, as demonstrated by „Google Trends" (Link). At the same time, Williams's estimates have more & more lost contact with reality: the GDP is corrected way too much, the CPI not enough.
Why? We have quite good cross validations, e.g. short- to intermediate-term GDP data is highly correlated to oil consumption. Williams' GDP estimates claim that we only had 2 quarters of economic growth in the 30 quarters 2000-7 (7% of the time), while the US GDP was supposedly contracting the remaining 93% of the time. This is totally at odds with oil consumption which increased substantially through 2004 and then remained stable for 3 years (Link). Due to the crude oil price exploding during this time period (+750% from the 2001 low into the 2008 high), the productivity gains & the ongoing de-industrialization of the US I estimate that the annual economic growth was 1-2% higher than the growth of oil consumption. The stable oil consumption 2004-7 implies economic growth during these years. In 2010 the US oil consumption increased by a robust +2.2%, suggesting a solid economic growth last year.
In a nutshell, these plausibility controls cast a very poor light on the shadowstats data & explain why the crowd has been fascinated by these numbers since last year: the crowd is almost never attracted by truth. An analyst being suddenly listed by „Google Trends" should better remain silent for a year because it's very likely that his statements are wrong. Hence the daily prayer of the analyst: "Lord, please let this Google trends cup pass from me." ;-)
The usual focus on the today irrelevant monetary aggregates M0-M3 was already criticized years ago (link). All that matters is money supply L (liquidity)=M3+public debt, which is of course going through the roof with public deficits higher than at any point in history. Publishing US L was discontinued in 1998, so today no one is remembering this key monetary aggregate. However, even within L huge qualitative differences do exist, as it makes a huge difference whether the private/ corporate sector expands money supply or the government. Every additional unit of fiat toilet paper created through public debt is much more inflationary, I'd estimate by a factor of 3 today (during normal times much less). Reasons: first, the public sector is almost always much less efficient than households & companies, and second reduces (crowds out) their economic activity, thus lowering the amount of goods.
Asian inflation numbers are certainly much closer to reality than the European & US numbers massacred by statistical terrorists. China recently released a consumer inflation of nearly 7%, official food inflation even amounted to 14.8%. Sure it's not much different in the West: the German Preiszeiger (PZ) index is probably the best independent inflation number (for daily goods). It shows an inflation of 13.8% over the past year, which has accelerated to a whopping annualized rate of +18.7% the past quarter. This is the situation in the most price stable (!) of the major Western economies... The independent AK index of Austrian inflation of daily goods soared to a yearly rate of an unbelievable 36% between March & June 2011. One can assume that the true US CPI is much higher than in the traditionally price-stable German bloc due to the weak dollar until August.
Let's compare the official numbers with the ones independently calculated by private companies. In June 2011 the PZ index soared with an annualized rate of more than 50% compared to May 2011. The rough equivalent to the PZ & AK indices is the food component of the EU HICP, the Harmonized Index of Consumer Prices (#1 of the 12 categories). Before you look it up: guess how much it rose between May & June 2011 when the PZ index rose by an annualized 50% (Link)? You will never guess... it didn't rise at all (0.0%), neither for Germany, Austria nor the entire Eurozone. So inflation was understated by a magnitude of ‘just' 50%...
Hyperinflations will start when the crowd doesn't expect it: The sudden interest in the search term „Hyperinflation" according to Google Trends in late 2008 was almost a guarantee that short- to intermediate-term inflation would drop (Link). However, at the Western inflation low around mid-2009 there was little interest in „hyperinflation" - similar to mid-2010, at the US inflation low. At present the number of inquiries is at the lowest level in 4 years, although even official inflation numbers are very high: since its inception in the 1990s the EU HICP was only higher than today a few months in 2008. And news reference volume even dropped close to zero, although the hyperinflation in Zimbabwe was already over in 2009. Sentiment must always be judged in the context of prices & the other fundamental data: so little interest & almost no news when inflation is so high is the most inflationary of all scenarios.
Without doubt, the extreme advance of commodity prices since 2010 is a guarantee that inflation will go through the roof soon, as consumer prices are lagging the futures by 2-3 quarters. Soybeans, corn, coffee, cattle, sugar and others are at or close to all-time highs.
It seems that the crowd is blinded by the preposterous theories of mainstream economics. The most absurd theory of all is that a hyperinflation requires a high capacity utilization. Of course, this is 100% wrong: all hyperinflations in history were accompanied by an economic collapse, with unemployment rates soaring to 30-95% & collapsing capacity utilization. A rebuttal of these & other claims can be found in two former articles on this topic (Link1, Link2).