May 2016 Investor Letter

Strategy Performance


Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. I follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. I always invest with the primary trend of the market and do not follow a benchmark. Instead, I manage the market risk for clients. This strategy has returned +11% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. My active asset allocation approach is best illustrated in the following chart.

AAA Asset Allocation.jpg

Gold Trader and Gold PowerTrader focus on capturing the strongest and weakest parts of gold's daily cycles, buying daily cycle lows, selling daily cycle highs and holding for 10-15 trading days, depending on the cycle count. This approach allows me to effectively manage risk. The strategy aims to capture +5% to 6% profit per trade while risking just 1.5% each time and has a win rate in excess of 70%.

Executive Summary

The Active Asset Allocator has returned +6.3% YTD versus +0.0% for the average multi-asset fund. My Technical Trend Indicator has triggered a buy signal, yet stocks have not made much progress since. I remain defensively positioned for now with 20% equities / 30% bonds / 30% precious metals / 20% cash. Over 40% of equities on the NYSE have already declined -20% or more, classic early bear market behaviour, though the large-cap indices appear unconcerned for now. This standoff should resolve itself shortly.

Meanwhile, bonds continue to rally while yields head towards zero or lower. This month I explain why I think we are finally approaching an inflection point in fixed income and the potential end to the 35+ year bull market in bonds. Calls for helicopter money are getting louder and investor confidence in central bank policy is about to be tested. I also discuss the World Gold Council's latest report on trends in the sector including a +122% increase in investment demand for gold year/year.

Stock Market Update

In 2016 year-to-date, global equities have returned -0.3%, EU government bonds +5.2%, EU corporate bonds +2.7%, gold +11.3% and silver +14.4% in euro terms. Over that period, the Active Asset Allocator has delivered a positive return of +6.3%, with just 20% invested in equities and 20% still held in cash, versus 0.0% for the average multi-asset fund. Last month, I noted that my technical studies triggered a buy signal for the stock market for the first time since September 2013 and that buy signal remains in place today. Price hasn't made much progress since the buy signal triggered and I continue to maintain a defensive position for now in the Active Asset Allocator


Today, over 40% of stocks trading on the NYSE are already down 20% or more (56% of small caps, 30% of mid-caps and 16% of large-caps) - classic early bear market behaviour. This fact has been disguised by the continued strong performance of a handful of names in the market-cap weighted S&P 500 and Dow Jones Industrials, which are driving those indices back towards their old 52-week highs. Volume has also been lacklustre on the recent rally in stocks. While the S&P 500 is not too far off breaking out to new highs, volume does not look like it will confirm the move higher. 


Last month, I highlighted the prior instances in 2000 and 2007 when the S&P 500 peaked and turned lower, followed shortly thereafter by a bearish cross of the 50WMA below the 100WMA. This coincided with the onset of a bear market in equities and a declining trend in US corporate earnings. At the time of writing my April Investor Letter, the 50WMA had not crossed below the 100WMA. That has changed with the bearish cross now in effect, though price is still holding above both long-term moving averages. A sustained break below 2,024 on the S&P 500 in the weeks ahead will increase the odds that a bear market in stocks has arrived. Conversely, if the stock market can consolidate recent gains despite the bearish cross, it should clear the way for higher prices later this year and I will adjust the Active Asset Allocator accordingly. For now, I remain patient.


Volatility is on the rise and there is no shortage of events this year that could drive equity volatility significantly higher including the Brexit vote next month, a potential hard landing in China, political and economic chaos in Brazil and Venezuela and of course the possibility of Donald Trump in the White House. The Vix Index below captures the trend in volatility of the stock market and this trend is on the rise. The multi-year basing pattern is similar to that experienced in the lead up to the last bear market in stocks and reinforces my belief that the stock market is in the process of topping.


It will be interesting to gauge the reaction of the Federal Reserve, ECB, Bank of England and Bank of Japan if a bear market in stocks gets going later this year. I believe they will panic and react by doing things that will appear increasingly crazy to many people, like helicopter money or some version of fiscal or monetary stimulation. I believe this will precipitate a crisis of confidence in paper currency, which is why the Active Asset Allocator continues to hold a 30% allocation to precious metals.

For more information on my stock market analysis, please get in touch. You can reach me at or at 086 821 5911.

Bond Market Update

From 1952 to 2000, it took $1.70 of non-financial borrowing to generate a dollar of GDP growth. By 2015, that number had more than doubled to $3.46. At the margin, an additional dollar of borrowing is losing its impact. Total debt to GDP across much of the developed world has now reached mind-boggling levels: 370% in the United States, 615% in Japan, 350% in China and 457% in the Eurozone. Meanwhile, GDP growth is decelerating. 

Central banks, in their capacity as lenders of last resort (and buyers of last resort of government bonds), have supported the explosion higher in debt in recent years and central bank policy will be responsible for the eventual debt bust. It is just a question of timing. I believe we are approaching an inflection point, potentially in the next 12 months, where markets will call central bankers' collective bluff... and then central bankers will panic.

What could be the catalyst? Perhaps wide scale debt forgiveness by the Japanese Central Bank, the largest owner of Japanese government debt or the Federal Reserve swapping Treasuries for 100 or 200 year bonds paying a 0.05% or 0.10% coupon or perhaps the introduction of helicopter money by one or more central banks. 

In fact, calls for 'helicopter money' are already on the rise today. Former Fed Chair, Ben Bernanke and more recently Bill Gross, fixed income manager at Janus Capital, have both touted helicopter money as a legitimate monetary policy tool still available to central banks in times of crisis. A search for "helicopter money" on Google Trends also confirms a growing interest from the public in this most unorthodox form of central bank intervention.


Experiments with helicopter money do not end well. The risks are high and consequences severe if badly managed. James Grant of Grant's Interest Rate Observer sums it up best:

Does the deployment of helicopter money not entail some meaningful risk of the loss of confidence in a currency that is, after all, undefined, uncollateralized and infinitely replicable at exactly zero cost? Might trust be shattered by the visible act of infusing the government with invisible monetary pixels and by the subsequent exchange of those images for real goods and services? ......To us, it is the great question. Pondering it, as we say, we are bearish on the money of overextended governments. We are bullish on the alternatives enumerated in the Periodic table. It would be nice to know when the rest of the world will come around to the gold-friendly view that central bankers have lost their marbles. We have no such timetable. The road to confetti is long and winding.
— James Grant, Grant's Interest Rate Observer

For more information on my bond market analysis, please get in touch. You can reach me at or 086 821 5911.

Gold Market Update

So long as gold and silver hold above their respective long-term 20 month moving averages, it is safe to assume the bull market in precious metals has returned. The key numbers today are $1,173 for gold and $15.60 for silver. YTD, gold is +11% and silver is +14% for euro investors.

I expect a declining US dollar will provide a nice tailwind for the next leg higher in the precious metals bull market. The US Dollar Index looks to have formed a multi-year top. The last time this occurred was in 2002 and coincided with the start of the gold bull market. I expect an equally powerful move higher in gold and lower in USD once the trends are set in motion.


The World Gold Council has published its first quarter 2016 report on demand trends in the industry and highlights some interesting developments in the sector this quarter. Overall, gold demand grew +21% in Q1 2016 to 1,290 tonnes, the strongest first quarter advance on record. While jewelry demand declined -19% due in large part to the recent surge in gold prices, investment demand more than doubled surging +122% year/year.

Inflows into precious metals ETF's accounted for 364 tonnes, the highest since Q1 2009. Also, of note, central banks continue to accumulate gold and added 109 tonnes during the most recent quarter. They are less vocal about their gold accumulation policy but are consistently one of the largest acquirers of gold each quarter.

The United States remains the top holder of gold bullion based on the World Gold Council's latest reported data with in excess of 8,000 tonnes, followed by Germany, the IMF, Italy and France. China reported 1,798 tonnes of gold reserves at 31st March 2016. 


For more information on my gold market analysis, please get in touch. You can reach me at or 086 821 5911.