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2022 Investment Review
Did Deano survive or get wiped out?!? With my 2022 Investment Review, I explore:
- What A Crazy Year
- My Investment Performance
- My Asset Allocation
- Biggest Investing News In 2022
- House Prices
- ESG / Climate Change
- Fiat Currencies / Dollar Wrecking Ball / Eurodollars
- Interest Rates / QE & QT / National Debt
- Crypto Melt Down
- Corruption / Kleptocracy
- Exponential Age / Optimism
- What Happens Next?
What A Crazy Year
This year has been a wild one. This one table explains it all. US Stocks ($VTI) DOWN, Int’l Stocks ($VEU) DOWN, Bonds ($AGG) DOWN, Commodities ($BCI) UP, Bitcoin ($BTC) DOWN (way down).
None of that has happened in a long time.
- When was the last time bonds went down >10%?!? Hint: It has been >50 years! Imagine owning bonds!?! Certificates of Confiscation!
- When was the last time stocks AND bonds were down over 10% in a year?!? Hint: It has also been >50 years!
- I didn’t know even commodities could go UP and that Bitcoin could go DOWN based on recent history!??! Ha!
- Add into that inflation prints that are astronomical by recent historical standards and we have a mess on our hands. The US (and other large global economies) put up inflation prints normally reserved for third-world economies in recent years. 7% at the end of 2021 and 7.1% currently. Does anyone else feel 14%+ poorer than they were a few years ago?!?
My Investment Performance
This was a bad year for Deanco Investment Group (i.e. me and also a VERY prestigious organization). This was the worst my portfolio has performed in a long time. I was down 32% in 2022. My blended benchmark portfolio that I track myself against was down 4%. I’ve been tracking all this since late 2017. Here are some important asset class returns for those years (along with my portfolio and benchmark portfolio returns).
Over the 62 months, I’ve been tracking things I’m up 27% and my blended benchmark portfolio is up 65%. A year ago, I was beating my benchmark. I was at 87% and it was at 71%. How fast things can change!
My portfolio has always been a little on the wild side since I tend to stay away from anything that normal people would call ‘safe’ (bonds, cash). Regardless, this year has been a wild ride for sure. I wouldn’t call it a fun ride either. I have a long time preference for these investments. I fully understand the risks I’m taking with these investments. I also haven’t seen anything that makes me believe my investment thesis needs to change. I’m fully prepared to weather whatever the markets throw my way (good or bad).
If you’d like to read it, I did an exhaustive deep dive (20 pages) on my investment thesis in late 2021 here: https://deanorolls.com/2021/10/31/4-years-of-being-a-super-nerd-about-investing/
My Asset Allocation
My basic thesis is I want to own a 60/40 portfolio. To most people that would mean 60% stocks and 40% bonds or vice versa (usually depending on one’s age or retirement status). I, however, do not want any of my investment capital in a dollar (fiat money) derivative asset (bonds). I don’t hold cash or bonds for this reason. I replace that part of the portfolio with commodities and Bitcoin. This makes for a wild ride for sure. I could care less. Bring it!
I own Bitcoin so I’m used to an asset going up and down wildly. All that matters, is that over a long period, everything goes up and to the right. 2022 was a crazy year but those happen. 2022 was on the extra crazy side, but my guess is there will be more like it (and probably/possibly worse) in the future. In the grand scheme of things, the assets I own should be worth more in a few decades than they are today. That is the thesis anyway. NOTE: Deano is wrong A LOT! Just ask my wonderful wife!
My investment portfolio is actively managed. A ton of it is housed in tax-advantaged accounts so I can trade as much as I want without fear of dealing with capital gain taxes. I also don’t get to take advantage of tax loss harvesting. I value the former much more than the latter, however. If my thinking changes I can change my positioning. I have done this from time to time. That said, I don’t do it without a lot of thought and I don’t do it quickly.
You can see a major shift in my thinking in 2020. When I saw the response to COVID I immediately exited all bond/cash positions (blue bars). I call this being ‘uncomfortably long’. I explain this here: https://deanorolls.com/2020/12/01/im-uncomfortably-long-assets/
I get my stock exposure using sector ETFs (from Fidelity). These are low-cost ways for me to implement my strategy of matching the target allocation of the 25-year average of the S&P 500.
The allocation to these sectors can sometimes vary wildly. For example, over the past few years, Information Technology companies have been bid hard and made up a very large portion of the index’s allocation (peaking at nearly 30% in 2021). On the other side, Energy companies were unloved and had their lowest allocation in decades (getting down to 2% in 2020). My strategy seeks to smooth all this out. When I think things are on the “stupid” side I will allocate manually (and outside the targets). I did this with Energy recently and got pretty aggressively overweight with that allocation (and still have an overweight in those stocks).
Speaking of Energy overexposure, that has proven to be a good move. The Energy sector was up 49% in 2022 (while the S&P 500 was down 17%). This was the top-performing sector by far! At the end of 2020, Energy companies accounted for 2.2% of the S&P 500’s market capitalization. Talk about unloved. Ask anyone if you should buy Energy stocks and you’d get some pretty puzzled looks. I overweighted the heck out of the Energy sector. I’ve sold as it has risen and I’m still overweight. At the end of 2022, they had a 5.1% allocation and this compares to a 7.8% allocation over the past 25 years. I plan to remain a bit overweight until this gap closes.
I have done a similar trade with Commodities. This is the same investment thesis (as the overweight Energy sector position). NO ONE wanted to own Commodities a few years ago. They were the only asset class to end up positive in 2022 (after being one of the best-performing asset classes in 2021 as well). I’ve sold as it has risen but I’m holding on to this position as I expect it will continue to do fine.
Biggest Investing News In 2022
I ‘shitpost’ my thoughts on Twitter (@deanoroll5). If you want to link up with me there my only warning is I’ll probably piss you off!
I like macroeconomics and I have opinions on it. I use it to help me set probabilities about what might happen in the future. I’m almost always wrong (as is everyone). So following macro (or letting it dictate your investments short-term) is asinine. No one knows!
These are things that caught my eye this year.
- Shortages – When the economy restarted post-COVID we quickly learned what happens when you shut down the global economy and pay people to stay at home. This is not a switch that can be flipped on and off with ease. A major cause of the inflation that occurred recently was due to this scenario. It seems to have finally started to settle down on most fronts (and so inflation should fall as well).
- Inflation – Inflation is a wrecking ball that destroys wealth. It doesn’t care about your wealth, your income, or anything else. When it is rolling along at 2-ish% a year no one seems to care too much (I do, however). Regardless, it will take many years to wipe out your wealth. When it kicks up to levels we’ve seen recently (7-ish+%) , it is a wrecking ball that can quickly change your wealth. For example, over the past two years, we’ve had back-to-back high inflation while also having nowhere to hide on the investment front and wages that are not keeping up. If inflation is making the price of everything you want to buy go up 14-ish% over the past two years and your stocks and bond portfolio is down 13-19% (like it was in 2022) then you just got 27-32% POORER in a short amount of time. PS – THAT JUST HAPPENED TO YOU!!! I take inflation very seriously as it should be taken. I believe the recent inflation was driven by the aforementioned shortages. Now that things have returned to a more normal state inflation should stabilize. That said if you believe the official measure of inflation that our government presents (CPI) I’m afraid you are not going to make it. This year was a particularly alarming year for inflation. I wrote about it twice during the year.
- House Prices – House values have skyrocketed across the nation. My stupid little condo in Nashville went up in value 30 months IN A ROW over the past two years! Good luck to anyone saving to buy a home in this environment. The Fed had rates low and was buying mortgage-backed bonds with gusto during this time. Now they’ve decided we need much higher rates and to stop the bond buying. The 30-year rate went from around 3% up to 7% this year. You gotta love central planning. You are doing a great job guys! Demand for homes has now fallen off a cliff since no one can afford a 7% mortgage with home values as high as they are. This does not end well in my opinion. Either interest rates come back down, or house prices are going to come down considerably. Another wild roller coaster ride coming our way due to our centrally planned economy. This time with the asset that is most Americans’ largest asset. Meanwhile, CPI doesn’t account for any of this. It is showing no signs of any of this. Great system we have!
- Farmland – Evidently Bill Gates is buying up all the farmland in the world (and going to make us all eat bugs). Regardless, if it is good enough for one of the richest men on earth it is good enough for me. We bought a farm this year. I’ve been learning about regenerative agriculture. This investment is not a part of the investment portfolio I track here but it is an investment, nonetheless. It might even wind up being an important one for our family. It checks a lot of boxes for me. They are not making any more land. The farm is outside of a major metro area which adds some diversity. Plus, it is a nice place to spend time. Money well spent/invested.
- ESG / Climate Change – I don’t deny that humans impact the planet. I do deny that we are causing climate change. We’ve been hearing about this for decades and it always is the same. The earth is going to end, the oceans are going to boil, and the ice caps will melt and flood the globe by [insert a year that is just a few years from now here]. It never happens. No one can predict what is going to happen. It is just like macroeconomic forecasting. Tons of people spend a ton of time and energy on it and not one of them has figured it out…EVER! The folks at the SEC have spent a lot of time and energy coming up with ESG (Environmental, Social, and Governance) guidelines that publicly traded companies are going to need to adhere to. Each company will develop plans to be more ESG-friendly and receive a score. What an absolute load of hot garbage. The amount of time and money every company is going to have to devote to this will be costly. It is a tax on the entire corporate structure in America. It makes me want to divest even more of the stocks that I own because if the clowns running these companies can’t come up with a better use of their time and capital than this they don’t deserve to get to have my capital involved. I’ve taken advantage of this, however. Energy companies are not ESG-friendly so Wall Street didn’t want anything to do with them. Good luck not needing energy. No one wanting to own them created excellent value for something everyone needs. I’ll continue to exploit the ESG stupidity as I can. PS – Don’t even get me going on adding electric vehicles to an already overburdened electrical grid!
- Fiat Currencies / Dollar Wrecking Ball / Eurodollars – I’ve studied fiat currencies for years (US Dollar, Chinese Yuan, Japanese Yen, Euro, etc.). These are the major currencies but almost every country has its own. Some are better than others (for what they set out to do). One area I spent the most time studying this year was the Eurodollar system (and the shadowing banks that run the system). NOTE: This is not the Euro (which is the fiat currency of the European Union). A few guys out there talk in detail about this system and how it works. Jeff Snider is one of them and he seems to have the best handle on the whole thing. He describes a system that is very misunderstood by almost everyone (most don’t even know it exists or how it works). The US Dollar is at the core of this system as the global reserve currency. The US Dollar is the “cleanest dirty shirt” in the world of fiat currencies and everyone on earth uses it to settle trade with each other. When US Dollars are needed the Eurodollar banks create them out of thin air and loan them into existence. Except when they don’t want to (like right now). When the system slows down and starts to seize up due to these massive shadow banks not wanting to lend you see 1) the US Dollar rise against other fiat currencies of the world (i.e. a US Dollar shortage) and 2) the Eurodollar interest rate rise. Both are happening right now. Prepare to buckle up! By the way, this is a fascinating topic.
- Dollar Wrecking Ball – Since the beginning of 2022 the US Dollar is up 9% against other currencies. At its peak back in September it was up almost 20%. The US Dollar remains at the highest level it has been in decades against other fiat currencies. The Eurodollar experts will tell you that this is because there is a massive demand for US Dollars (due to the Eurodollar banks not creating enough). When this happens the “cleanest dirty shirt” goes along like a wrecking ball wreaking havoc on other economies across the globe due to the ‘exorbitant privilege’ of being the world’s reserve currency. The USA loves this but there are plenty of people in the world who don’t like this. Several of these countries are large and fast becoming global competitors to the US. They see us print money we don’t have, running up enormous debt in the process but telling everyone to ‘trust’ the US Dollar. Many of those countries have stopped buying US debt, and some have stopped holding US debt. These countries’ interests and a US Dollar reserve currency do not align. I don’t blame them and agree with them. Why would I hold any wealth in a fiat-based currency that can be debased (and has been steadily for decades) when I can buy real assets that cannot be debased?
- Eurodollar Futures (i.e. Interest Rate) – You can watch the Eurodollar futures to see what the enormous market thinks of the economy of the globe. You’ll see the Eurodollar “interest rate” climb when they demand more yield to lend. Each time you see a sharp contraction in this interest rate it is usually a cause for great concern. What were the last few times we saw massive contractions? 2000 (internet bubble bursting), 2006 (remember the 2008 financial crisis), 2018 (taper tantrum + US/China trade war), and now (2022). We are about where we were before the 2008 financial crisis right now. This points to rough waters ahead for all involved. YIKES!
- Fiat Currencies – The Eurodollar experts tell us how everything we know is false. Everyone says governments print money from thin air and that is false it is the Eurodollar bank. Everyone says the central banks set and control the price of money which is false. They control nothing since they don’t control the money (they don’t even know how much money there is). They akin the leading central bankers to speech makers who need to act like they are in control. I don’t disagree with the Eurodollar experts at all. They tell us that no one even knows who the Eurodollar banks are, or even how much money they control. NO ONE even knows how many Eurodollar loans there are (including the Eurodollar banks themselves). Any of these Eurodollar banks can make new collateral anytime they want (or destroy collateral as well). All they are doing is creating ledger money out of thin air. I don’t dispute anything the experts say (except that governments don’t ALSO print money out of thin air). We know they do (like when they printed many trillions during COVID and handed it out in the form of stimulus, PPP loans, and rebateable tax incentives). The Eurodollar experts don’t refute that they just say that a few trillion here and there is chump change compared to the size of the Eurodollar system. In all my study on the topic, I realized that fiat money (even the US Dollar) is not worth anything. It is created and destroyed from thin air by someone who is NOT ME. That said, in my mind, it is the ultimate form of manipulated hot garbage. If I want to create money to go into my account, I have to do something to earn it (trade my time or my capital for it). The people controlling the fiat money process do not have the same constraints. This is why I don’t any exposure to it in my portfolio. I only want to own things that are ‘real’. I only want enough cash in my account to live on for the upcoming weeks/months. I do not want to own a bond that was created by a government or corporation and that is denominated in a fiat currency that can be debased at the stroke of a ledger key. HARD. F’N. PASS.
- Interest Rates / QE & QT / National Debt – If you believe the Eurodollar guys (and I do) the Central Banks are nothing more than talking heads with no control over anything (only the illusion of control). Regardless, almost everyone hinges on every word they say so I guess they need to be studied. The Fed has been yapping about raising rates and tightening all year. They claim higher rates and tighter rates will ‘tame inflation’. It might do that. It might also be a big problem when whatever calamity awaits us (there is always something they can’t foresee). This is the problem with central planning. I keep up with the Fed but I don’t expend a lot of energy on them or anything they say. I know they will conjure up massive amounts of money and lower rates whenever something comes off the rails. I know that by doing this they will do their part in debasing the currency. That is all I need to know.
- Interest Rates – They wound up raising rates decently. After leaving rates at near zero since COVID (in April 2020) they started raising in March of this year. Rates went from .25% in March to 4.25% in December. One .25% jump, two .50% jumps, and four (consecutive) .75% jumps. I didn’t expect them to make it this far without something breaking. I think things are breaking by the way. The Fed notoriously drives while looking in the rearview mirror. I suspect they are entirely too tight with interest rates right now (and the bond market agrees). I suspect Bonds will be a very good trade soon as the Fed will reverse course on their rate hikes. They won’t do it until we have some newsworthy crisis (and no one knows when that might happen…but it will).
- Quantitative Tightening The Fed Balance Sheet – On the balance sheeting tightening (QT) side they made less progress. The balance sheet expanded from $4.2 trillion when COVID began in February 2020 to $9 trillion in April 2022. Since then, it has been whittled down to $8.5 trillion. I don’t believe the Fed will ever make a huge dent in its balance sheet. The next “crisis” will arrive and it will abandon current QT efforts and balloon its balance sheet to sights unseen.
- National Debt – Raising rates might be able to slow down inflation (if low rates were causing the inflation…pretty sure it wasn’t). Raising rates on a highly indebted balance sheet is a good way to create a mess. The Fed of the 1970s which was raising rates to fight inflation had a Debt to GDP of around 40. Today we are near 140. We have a mountain of debt! When the Fed ‘raises rates’ it causes the US interest expense to rise dramatically (it is racing higher currently). In my opinion, all this debt and interest rate manipulation is centrally planned stupidity. The leaders in charge of planning it are incompetent on every front.
- Crypto Melt Down – There was a hack of BSC (the fourth largest crypto on earth) on Binance (the largest crypto exchange on earth) that started a crypto meltdown around October. A few cryptos, crypto hedge funds, and crypto lending platforms started imploding as well about this time. All were scams/Ponzi schemes. In early November the FTT crypto token blows up. At that time we find out the associated FTX exchange (the second largest exchange on earth) and associated entities were a Ponzi scheme. Burn it all down! Fine with me. Bitcoin got walloped both times. Meanwhile, Bitcoin settled $14 trillion in value in 2022 without issue. Tick tock, next block! I don’t think the crypto meltdown is finished. Some entities are teetering on the edge. We’ll find out which ones survive soon enough. My strategy is to buy Bitcoin and only Bitcoin!
- Bitcoin – I own Bitcoin and have written about it twice. The first time was when I bought it in December 2019. I did a follow-up in March of 2021. I’m going to own it forever. HODL!
- Other cryptos – I’ve kept up with other cryptocurrencies (besides Bitcoin) along the way. I never pulled the trigger on buying any of them. I wrote this in November 2021 to outline why.
- Corruption / Kleptocracy – We are presented with news daily about corruption within our system. Greedy people from all walks of life doing things that are illegal, immoral, unethical, and unloving. Bless their hearts (or lack of one)! There are bad actors all over the place that add no value to humanity other than to increase costs for the rest of us (to pay for their crimes). I’m not just a conspiracy theorist, either. Okay, I am, but, there are people with bad intentions out there. Many of these people are in positions of power and use that power to take more while doing less. These sociopaths (or more likely psychopaths) serve us no use at all. In a kleptocracy, corrupt politicians enrich themselves secretly outside the rule of law, through kickbacks, bribes, and special favors from lobbyists and corporations, or they simply direct state funds to themselves and their associates. I believe we live in a kleptocracy. There are some good people in our government, but they are outweighed (greatly) by those with special interests and self-interest. Sad, but true.
- Exponential Age / Optimism – A person I follow on Twitter talks about how we are living in an exponential age. As the risk manager of my portfolio, one might read all of the above and believe I have a pessimistic view of almost everything. I don’t. I’m an optimist through and through. I wouldn’t take risks with my capital and time if I wasn’t. I am part owner of the company I work for (and have been for the last several years). Believe me, nobody who is a pessimist would continue to own a business given how the last few years have gone. I believe the way to get ahead is to work hard and own your work. The reason I own stocks in my investment portfolio is so that I can participate in the enormous growth potential of the US economy without having to work for these companies (or do the work they do). The world will change in unimaginable ways over the coming decades. Things like artificial intelligence, DNA sequencing, robotics, energy storage, and blockchain technology are coming. And I’m here for it! The human mind isn’t adept at understanding or even recognizing trends like these that are producing exponential change. I enjoy learning about them but don’t have a clue what is to come. I hope the companies I own wind up owning these technologies that will revolutionize humanity (and our productivity) and that they profit from bringing them to the world.
In short, I don’t care about any of this ‘news’ (COVID, inflation, shortages, crypto meltdowns, shitcoins, ESG, money printing, corruption, mandates, climate change, fiat currencies, Eurodollars, QE/QT, debt to GDP, interest rate manipulation, the WEF, kleptocracy, etc.). We live in a clown world for the most part. I am aware of it but don’t let it bother me or my progress toward my goals. The assets I own in my portfolio are my defense against these things. We’ll see if my plan works.
I own what I own and will not get shaken out of any position I own. I am not using leverage so I can hold anything I own indefinitely. That provides me with an enormous advantage over others in this environment. I’ll be looking for people “swimming naked” when the “tide goes out”. A great example of this is what is happening in the crypto space right now. Forced sellers (due to leverage) are serving up great buying opportunities for those with capital. In the grand scheme of things, if my portfolio loses value then a lot of other people around the world are feeling the pain train too (probably much worse than I am). I’ll survive due to my ability to keep my emotions out of it. If there is anything investing in Bitcoin has taught me it is how to shrug off wild swings to the upside (and downside) with little fanfare or gnashing of teeth. I’m prepared for whatever comes. Bring it!
What Happens Next?
I guess the biggest debate about money and investing these days is which is right: the Keynesian or the Austrian system. Keynesians believe in more centralized (i.e. government) control of money and economics. They generally believe a floating fiat-based money supply isn’t an issue as it allows the economy to expand and contract as needed. We live in a Keynesian system (controlled by the elusive Eurodollar). Austrians believe that money should be decentralized from governments and of fixed supply which will lead to deflation over time for those who work and store their wealth in money. Bitcoin is an example of hard money that could form the digital collateral for a system of this nature to operate effectively in today’s world.
Bitcoin is an incredible revolution that allows the Austrians their best chance to bring their ideology to life. I’ve listened to hundreds and hundreds of hours of podcasts on the topic over many years. I think the world (not the US necessarily) needs an innovation like Bitcoin. I think its adoption will be driven by the people most hurt by the current system, the global unbanked (there are billions of them). The US Dollar/Eurodollar system does not help these people in the slightest way. More power to them!
Meanwhile, the Keynesians are doing themselves no favors by never taking away the ‘punch bowl’ that has allowed our finances to become such a mess. 2022 highlighted much of that insanity perfectly. We’ve had manipulated money (money printing and artificially low rates) set by government central planners for decades. I’m not sure a few people in a room can do a better job of managing the global economy than the global economy can do itself.
I don’t know the answer to which one is better or which one wins in the long run (or if either does). I don’t think either will in my lifetime. I think that less central control and a more free market are better. I have a hunch that basing our money (something that is at the core of everything on this earth) on something that cannot be printed out of thin air by anyone at any time is better. So I sympathize with the Austrians greatly. But these are extremely complex topics and I’m just a poor boy from a small town in Tennessee. I could be wrong and if I am I don’t want to get wiped out.
Hence the reason I’m a 60/40 guy. 60% of my portfolio is financial instruments that are based on the current fiat monetary system (stock ownership). These companies invest capital to produce something that allows them to earn a return. 40% of my portfolio is grounded in things that have scarcity and cannot be produced without expending labor/energy (commodities and Bitcoin). I do not invest in cash because it is not an investment. I do not invest in bonds because the yields will not allow me to outpace inflation AND because they are fiat-derivative contracts. I have used them to park money in the past to ‘have some safety’ but that went away in 2020 for me. I believe they are Certificates of Confiscation that are programmed to debase. How ‘safe’ did you feel in bonds this year when they were down 21% from their peak and inflation was running 7%+ in consecutive years? I’ll take my chances with the wild swings of whatever market I’m invested in.
Regardless, I believe you need to be diversified and don’t believe your own bullshit! I shitpost all kinds of wild stuff on Twitter regularly. I take time on a semi-regular basis to write down my thoughts and share them. This has led to pushback from people at times which has helped me to clarify a position or belief I might hold. This is valuable to me (which is why I write this and share it). It is more for me than anyone who might read it. I have definite thoughts on my view of the financial world. But I don’t go all in on any of it. Because I might be a great big dumbass! Highly likely, in fact!
That is investing in a nutshell. Don’t let your own opinions or thoughts get in the way of keeping and growing your wealth. No sense in being a damn fool about it!
I hope your investing is going well!
Till next year,
President and Founding Member of Deanco Investment Group (A Very Important Organization)