December Mid Month Update

“Investors have lost an estimated $22 trillion in equities, bonds, cryptocurrencies and real estate in 2022.” – Bank of America 


The lauded 60/40 bond/stock model has had a terrible year – one of the worst on record.  Not coincidentally, it’s the same year that the Fed and other global central banks finally reversed their accommodative courses and began instead to raise rates and attempt to tighten up their grossly bloated balance sheets.


That’s the bad news.  The good news is that there are still ways to make returns in this environment, but it involves a new plan of attack.  Investors have been lulled into a tranquil state of bliss during the past 10-12 years as money remained cheap and conditions accommodative while asset prices levitated.


That all changed this year, and it’s not a one-off.  Persistent inflation and out-of-control debt will keep the Fed and other central banks in a tightening mode. The Fed and more so the ECB told us that this week. As 2022 has exhibited, that is not conducive to traditional strategies that investors have been programmed to deem beneficial   


Lenders and bargain hunters face much better prospects in this changed environment than they did in 2009-21.  And importantly, of you grant that the environment is and may continue to be very different from what it was over the last 13 years –  and most of the last 40 years – it should follow that the investment strategies that worked best over those periods may not be the ones that outperform in years ahead. – Howard Marks, Oaktree Capital, December 13th Sea Change

These are confusing times and it’s a  tough world to decipher.  That’s not going to change anytime soon, or maybe ever.  Which is why we are seeing a real shift into the alternative asset space, as evidenced in the graph below. Sophisticated investors are getting ahead of the curve:


*Goldman Sachs boosts target for 2023 alternative fundraising to $225 billion from $150 billion.  Their chief commodity strategist says 2023 will be the year of commodities and favors energy and gold.


*BlackRock is now recommending clients allocate 20% of their portfolios to alternative investments and says we’ve entered into a new world order,” in which “We see geopolitical cooperation and globalization evolving into a fragmented world with competing blocs.”


*October of this year, Fidelity announced they were building an alternative investment unit to meet retail demand.

“Retail and registered investment adviser demand for liquid alternatives is huge. Fidelity is far from the first mover here, but they have the capital and market understanding to make it a success” Amanda Tepper, CEO Chestnut Advisory Group


It’s reasonable to assume that if Goldman, BlackRock, and Fidelity are ramping up their alternative asset space, there are scores of big institutions gearing up to do the same.

Some advantages of Alternatives:


  • Low correlation to traditional portfolios
  • Broader diversification
  • Enhanced returns


Alternative investments combined with tactical trading amongst a swath of different markets are the most efficient way to attack this new environment, rather than succumbing to it with outdated thinking and strategies.


“Certain hedge fund strategies can perform well in volatile and sideways-moving markets, an environment we expect to last into next year,” Mark Haefele, chief investment officer at UBS Global Wealth Management


NHL legend Wayne Gretzky summed it up best with his legendary quote:


“I skate to where the puck is going, not where it has been.”