Update - March 9, 2021
What to Do With Rising Rates
Interest rates are rising. That’s no secret.
Since the beginning of the year, the benchmark 10-year Treasury has gone from 0.91% to 1.6%. Real interest rates (subtracting the rate of inflation from the 10-year) have gone from negative 1% to negative 0.62%.
Clearly, investors are bracing for inflation – a drum we’ve been beating for many months.
The big question now is this… Are the folks at the Fed right?
Are higher prices really just a “transitory” move due to a rebounding economy like Jay Powell seems to think? Or are we just seeing the beginning of the trend?
What comes next and what it means for our Modern Asset Portfolio will be the topic of the next monthly issue. That’s where I examine what our portfolio will look like if and when real rates turn positive for the first time in more than a year.
But I’ll give you a bit of a sneak peek today…
No More Deflation?
As you know, we’re currently overweight on what I dub “deflation leaders.” These are the stocks that – mainly due to new technology – have been pulling the prices of goods and services down.
They’ve been a thorn in the Fed’s side for more than a decade. They’ve kept the Fed from hitting its self-prescribed 2% inflation target.
Companies like Amazon, Google and even Walmart have made the economy incredibly efficient. They’ve pulled prices down dramatically. And it’s not just these big behemoths. Across the economy, we’ve seen web technology dramatically slash the cost of things. It’s affected everything from the way we shop to the way we work and even the way we invest and save our money.
The fintech revolution of the last decade is a great example of the moneymaking potential in the sector.
One of the companies quietly leading the charge is in the “deflation leaders” section of our portfolio. Avalara (AVLR) has given many old-school accountants sleepless nights as its tax preparation software has made it easy for folks to do their taxes on their own… for far less than what an accountant would charge.
It’s deflationary technology at its finest.
But as interest rates have risen, we’ve seen the market turn away from these types of stocks. It’s just as our theory says would happen.
Looking at a chart, we see Avalara’s strong run came to a halt just as interest rates began their big climb at the start of the year.
The two lines crossed in early January and have grown further apart in the days since. The trend is likely to reverse. If the Fed goes after inflation in its big meeting next week, rates could come down quickly.
It’s why I am not adjusting our portfolio allocation until real rates turn positive.
Avalara could come roaring back. But we are not going to stick around to find out. Our investment thesis is simple. We follow the numbers, shun emotional trades and exit our positions when our predetermined limit is hit.
In this case, we had a 25% trailing stop on Avalara. And now that it has dipped from its high in January, it is time to sell.
Action to Take: Sell Avalara (NYSE: AVLR) at the market’s price.
Crypto Gets a Bid
Here’s another sneak peek at what’s ahead for our Modern Asset Portfolio… cryptocurrency.
It’s important to note that cryptos are not just a digital money story. They’re also an emerging disruptive tech story.
In other words, some will soar as inflation takes hold… and others won’t be able to hold their speculative value as rising rates make other safer assets more appealing.
My job will be to sort the good from the bad.
As a competitor to sovereign currencies, Monero (XMR) is clearly aiming to be a form of digital money. It means its value will increase as the dollar weakens and inflationary pressure grows.
It explains this chart…
It shows that Monero has done exactly what our modern asset portfolio theory says it should do. It has kept up with rising rates.
As I write, thanks to another 10% surge today… we’re up more than 135% on our Monero position.
Very nice.
Our system is working exactly as designed.
Stick to it and there’s not much to worry about as rates rise and fall.
Let me know how your portfolio is faring or if you have questions. Drop me a line at mailbag@manwardpress.com.
Be well,
Andy