“Proper Planning and Preparation Prevents Piss Poor Performance” is the guidance, while humorous, to increase our chances to experience favorable outcomes. In investing, there are economic guideposts to point us in the general direction to “what” we should be planning for. Asset pricing (the change in price of assets) then begins to anticipate or handicap the most likely economic result. This is precisely why we trend-follow. Last, we utilize clarity to remain open to the possibilities, but also to remain steadfast in our conviction. Our goal is to use data and eliminate noise, emotions, and narratives. Wall Street is full of Pinocchio’s, so we need to carry a hacksaw!

Like any good son of a carpenter, you would never show up to a job site with just a hammer. In investing, we never show up with just one indicator/data point to base our decision-making. We also never rely on how we are feeling either. For the sake of time and to try to understand why I do what I do (assuming I’m not just a cure for your insomnia), I am only highlighting one reference to a mosaic of other stuff.

I hope I’ve already made it clear from earlier posts that the data is showing that the highest probability moving forward will be a slowdown in both the economy and inflation. I believe that Wall Street is completely wrong on this and misguiding their clients. It is my job to correctly read the field and help to facilitate the transfer of wealth from their client’s accounts into my client’s accounts. Sorry, this is a meritocracy and not everyone gets a trophy.

The graph above charts the comparison of non-investment grade bonds (crap paper) to treasuries. You can research the exact make-up, but this essentially reflects how the capital market’s feel about risk. If there is an appetite for risk and the economy is strong (default risk is low), then the line in the graph will be declining or simply low. If the market is beginning to re-price risk higher (prices go down), then the line begins to slope upward. It has been my experience that anything north of five is stressful to the credit markets. You can take my word for it (or you can go back and look at the time periods I’ve marked in red), but these stresses flow into the stock market. During the times on the graph when high yield spreads were widening, stocks either declined a lot or experienced much volatility with no real upward progress. I don’t know about you, but either one of those scenarios doesn’t sound like fun.

So what do we do now? Portfolios should already be proactively prepared (you see what I did there?) for peak inflation and for corporate profits to slow. We are watching for indicators like the one above, to signal that the market is beginning to re-price risk. This re-pricing tends to happen slowly then all at once. So you kinda have to be there first because if you are not early, you’re late. We are also watching assets like U.S. dollar, conservative bonds, gold, and low volatility stocks (utilities, consumer staples, REITs) to show outperformance. These will be our green-light, confirmations that we are on the right path. The CPI number will be released tomorrow and it will most likely support the inflationary drumbeat of Wall Street. It will be interesting, however, to see what interest rates actually do after that report. Will they signal the top?

Have a blessed day!!

P. Franklin, Jr., CEO

Franklin Trend Investment Management, LLC