The Minimalist approach that beats the S&P 500!

Welcome to another edition of The Minimalist Portfolio. Here, we don’t do storytelling or opinions. We focus on the data and outperform with our actions!

 The S&P 500 is up +9% Year To Date,
while The Minimalist Portfolio is up +15.74% YTD.

This week, I want to focus on inflation. This is not because the Consumer Price Index (CPI) data are out. You should know we don’t focus on that type of data.

CPI data is backward-looking because it shows changes in prices that have already happened. It is measured by comparing prices to their previous costs.

Not only is this measuring what already happened, you should also factor in a delay between when they check prices and when the data gets published.

Governments and banks use this information to understand how prices have changed and to make decisions about interest rates, but it doesn't predict what will happen next.

GROWTH

I will talk about inflation in more detail below. For now, the main message is that inflation is becoming so severe that it’s impacting growth and how we should position ourselves.

Let’s get into the data!

While it is satisfying to be correct that inflation has been higher for longer, this dynamic has some less fortunate consequences. To illustrate, we look at things as the letter K. The top part is asset owners who profit from inflation as their assets' prices increase. Unfortunately, the bottom part of the K is those who don’t own assets and only feel inflation with their costs rising. While this may seem logical, it’s important to understand small businesses are at the bottom of the K.

 The NFIB Small Business Optimism Index gauges small business owners' confidence about the future through surveys on sales, hiring, and the economy. A high score signals optimism, prompting investment and hiring, while a low score suggests caution, potentially slowing growth.

INFLATION

It’s amazing how the Federal Reserve is acting like inflation is behind us. They are trying to act like they will lower rates as they have “beaten inflation”. At the same time, all the data shows that inflation is increasing. Cocoa is still going up at +240% year-over-year.

 Some more examples are:

CRB Commodities Index inflated +11.9% in the last 3 months

• Copper inflated +11.3% in the last 3 months

• Coffee inflated +16.2% in the last 3 months

• Lean Hogs inflated +54.1% in the last 3 months

• Silver inflated +18.0% in the last 3 months

The bond market is often called "smart money" because it's dominated by experienced investors and institutions that analyze economic data and market trends closely. These investors are often seen as having a deep understanding of financial markets, and movements in the bond market can provide early indicators of broader economic shifts.On the bond market, the 2-year yield reflects investors' expectations for future inflation and interest rates. When it rises, it suggests expectations of higher inflation, and when it falls, expectations of lower inflation.

Just look at the chart below and how it’s correlating with the commodities data mentioned above. This doesn’t look like an environment the Fed will be cutting rates into.

Another leading indicator of inflation is the price of Oil. It has inflated by +27% in the last three months! With this trend, it’s mathematically impossible for inflation to slow.

As you know, we are long Oil, so that has been paying off quite nicely!

Let’s get into the full portfolio!

PORTFOLIO

Even though we are keeping the same positioning I have some important news! When I’m analyzing the markets, looking for the best entries and exits for OUR portfolio, I have changed my stance a bit.

I’m not as excited to buy dips in US Growth exposures anymore, as they may not be dips at all.

The reasons for this are:

• US Growth is Rate Sensitive. As explained above I’m doubtful of lowering rates.

• The fact is that a lot of the growth stocks are smaller companies. As I explained above, they are in the bottom half of the K.

• There are plenty of better inflation plays I’m looking to create exposure to! It’s so great to be in this profession that provides this level of flexibility!

What’s on my watchlist right now?

• US Dollar is a great way to set up for higher for longer inflation AND a re-pricing of Rate Cut Expectations.
  Copper also combines the exposure to the Chinese Economy and inflation.

• The Energy Sector is an obvious play on the Bullish US oil.

• Saudi also rides this trend nicely and has bullish economic fundaments.

You must be very patient to get the best entries so I will keep you updated! For now, let’s break down how our current positioning is performing!

Technology Sector (XLK) + 6.5% YTD

This exchange-traded fund (ETF) includes major technology titans such as Apple, Microsoft, and Amazon, renowned for their steady innovation, strong brand allegiance, and continuous revenue expansion. While numerous voices suggest these stocks are potentially overpriced, I am hesitant to overlook their remarkable growth potential. As mentioned earlier, our strategy doesn't entail long-term holdings of these assets, but for now, I'm inclined not to go against the prevailing momentum in this sector.

US Insurance (IAK) +13.6% YTD

Investing in the insurance sector provides exposure to a stable industry, the potential for high returns, and inflation hedging.

Healthcare (XLV) +4.2% YTD

This defensive sector demonstrates less dependence on economic growth and has proven resilient during recent market fluctuations. Factors such as aging populations and escalating healthcare requirements worldwide contribute to the sector's promising long-term growth potential.

Gold +16.7% YTD

Gold has been solid historically in the given macro environment especially relative to the S&P500.

It’s a true classic in terms of holding up as a haven asset in higher volatility environments.

WTI OIL +12.4% Since Entry Fri 23 Feb 2024

While the U.S. Government keeps declaring victory on inflation, we’re going to keep buying inflation. The Global Industrial & Manufacturing Cycle bottomed in December of 2023 what remains Bullish for oil.

India (INDA) +7% YTD

The difference in real growth between India and the median G20 economy is set to reaccelerate in 2Q24 while already being the global growth leader through 2024.

Netherlands (EWN) +10.7%

The Netherlands economy is expected to grow moderately in 2024, driven by exports, domestic consumption, and continued government stimulus. The biggest parts of the economy are good sectors like financials, energy, and consumer staples.

Japan (NIKKEI225) +18.1% YTD

Japan has been releasing great economic data and have accommodative policy going for them. Compared to other developed markets, the Nikkei 225 historically trades at lower valuations, making it appear more attractive to value investors seeking bargainswith good expectations for the future.

China (SSE) -0.3% Since Entry Fri 8^th of March 2024

China has strongly accelerating Cyclical Data. Including china to the portfolio increases upside while also making sure we include true diversification.

Bitcoin (BTC) +68.6%YTD

Bitcoin is always a momentum play that is clearly starting. I’m not a crypto expert nor am I a long-term holder but the when the excitement about another bull market starts it makes more noise and draws more amateur investors in than anything else. This makes it a self-fulfilling prophecy and something we want to participate in.

I hope you enjoyed this edition of The Minimalist Portfolio. I’m grateful you are here from the start and I’m looking forward to outperforming together with you!

All the best,
Philippe