Ah yes, interest rates. The two words that should never sit atop an entertaining column.
Thrill us… they won’t.
Make us rich… they will.
Our track record proves it.
We’ve said many, many times that interest rates are the hormones of the economy. They control all that happens on Wall Street.
When rates are high… consumers do one thing. When rates are low… they do another.
But most asset allocation models say nothing of rates.
It’s nuts… especially now that rates mean more to the direction of the economy than ever before.
Not standing for insanity (it’s not as socially acceptable as it once was), we put our calculator to work and created a new allocation model.
It uses modern theory and modern assets.
If you’re a Manward Letter (our paid monthly newsletter) subscriber, you know it well. We call the result of our work the Modern Asset Portfolio.
It starts, of course, with interest rates. It has five distinct levels, all based on “real” interest rates at the time (that’s the 10-year Treasury rate minus inflation):
- 0% to 1%
- 1% to 3%
- 3% to 5%
- Greater than 5%.
Each level calls for its own unique mix of assets.
After all, if we compare an economy that has negative real rates with one that has rates above 5%, we’d see some stark differences. Wouldn’t it make sense, then, that our investing strategy would be starkly different as well?
Right now, the figure sits at negative 1.06%… near record lows. It means we follow the allocation scheme outline by the “negative” level bolded above.
A Faster Way to Get Rich
Let us be very clear about the theory behind our Modern Asset Portfolio.
This is very different from the traditional models penned by fellows like Harry Markowitz.
Markowitz’s model, which is the basis of almost all mainstream allocation models today, fails to capture the constant – and often sudden – movements of correlations.
A 50-year correlation does you no good if it breaks in the 10 years before your retirement because of a fast-moving, new (or modern) trend.
That means we can’t lay out a strict investment thesis for the “Greater than 5%” level with any sense of accuracy until we get closer to that environment. It could be generations before we see rates climb that high again.
To describe today what that will look like would be mere guesswork.
But – and this is critical – using interest rates gives us the catalyst to adjust our allocations and make smart, forward-looking adjustments as we transition from one level to another.
Again, Markowitz’s theory does not allow for that. With his outdated model, there’s no catalyst for looking at current correlations and comparing them with historical numbers – a deadly flaw.
Take, for example, the level that we are currently at – again, negative real rates.
It calls for a relatively heavy dose of non-income-producing assets, like gold and cryptocurrency.
To say Bitcoin has a “historical” correlation with stocks is nonsense. It’s too new. To say it does or doesn’t have a tie to stocks is like getting married after a first date – we wouldn’t have much of a sense for each other.
Right now, for example, the correlation between Bitcoin and the S&P 500 is fairly strong.
It won’t last. But the reason the tie got so strong last year will.
Again… it’s interest rates.
As the Federal Reserve slashed rates and promised us it “isn’t even thinking about thinking about raising rates,” investors ditched the idea of finding income from traditional sources and poured into speculative assets.
Tech stocks… small caps… gold… and crypto soared.
In fact, the crypto we recommended when we debuted this theory last fall has now doubled in value.
Using our model, it was hardly a speculative move.
The types of stocks and “modern assets” we are investing in within Manward Letter‘s portfolios will continue to rise as long as interest rates are low and consumers are willing to speculate.
And as rates change… we’ll adjust our model.
That doesn’t happen with traditional allocation models. They merely hold the same group of stocks in the same proportions regardless of economic conditions.
Many of the assets we invest in today weren’t around in the 1950s when today’s models were developed.
Crypto… buyback stocks… even options are all relatively modern concepts.
When Markowitz put his pen to paper, today’s ultra-efficient markets (with high-speed trading, high-powered algorithms and nearly instant price discovery) were unimaginable.
Technology has rewritten all sorts of long-standing “rules” of the economy.
The bottom line is if your portfolio is falling short when markets are zooming (every one of our recent crypto plays is up by double or triple digits) and it isn’t protecting you when prices retreat… it’s time to do something different.
It’s time to put our Modern Asset Portfolio to work… today.
P.S. We just sent our latest research report to Manward Letter subscribers. It details a fast-moving opportunity in a pre-IPO that has technology that could shake the 5G market to its core. This company could be trading under its new ticker symbol on April 1… but we’ve got a way to get you in today. Click here now for all the details.
Do you have questions about how to use Andy’s new portfolio strategy? Send them to firstname.lastname@example.org.