IndexJumping

We begin by creating a universe of securities balanced to economic outcomes- i.e., a universe of securities that includes investments that can do well in every economic environment. Our research has shown that the primary drivers of the economic cycle are the permutations of Growth, Inflation, & Liquidity. To have the highest probability of creating a portfolio that can durably perform in an environment, we maintain a diverse array of ETFs to go long or short:

• Stocks: SPY, XLI, XLE, XLK, XLV, XLU, XLF, XLY, XLP, XLB, XLC, XHB.

• Commodities: DBC, USO, UGA, UNG, CORN, SOYB, CANE, WEAT, CPER, SLV, GLD, PAL.

• Fixed Income: TLT, IEF, IEI, SHY, MBB, VCIT, USHY.

• Currencies & Cash: UUP, FXE, FXB, FXY, FXA, BIL.

Each of these assets is pre-packaged to perform better or worse based on the permutations of growth, inflation, and liquidity, i.e., they have an inherent economic bias. Below, we show the decision tree we use to find the bias of a given investment asset:

Where, Growth = Real Output, Inflation = Price Level, and Liquidity = Stock Of Cash-Like Assets.

We begin by broadly dividing periods, based on nowcasts & forecasts, into periods of expanding or tightening liquidity. Liquidity is the stock of cash-like assets in the economy, which potentiates future economic and market activity. When liquidity is expanding, the likelihood of future economic activity being positive is high, and capital flows from cash to riskier places, i.e., to investment assets like stocks, bonds, commodities, and tangible assets. Further, the distribution of asset class returns is driven by the balance between growth and inflation— stocks prefer real growth, fixed income prefers disinflation, and commodities outperform during stagflationary periods. Conversely, when liquidity contracts (usually through tighter monetary or fiscal policy), the dry powder that supports investments begins to dry up, resulting in an environment where investment assets face headwinds— during these periods, dollar assets and cash tend to be the only game in town. It is important to understand that choosing an asset universe with securities that can perform in each environment is imperative to creating a successful portfolio. While we hope to know the economic regime over the six months, we simply don’t know the distribution of regimes over the next decade. Therefore, creating a universe that can deal with any environment is imperative to success.