I’ve been managing other people’s money for over 20 years. Before starting my own company, I worked for two very large bank/brokerage firms each with tens of thousands of employees. I’ve professionally lived through many market cycles and have witnessed how both clients and advisors react to certain events. I can wholeheartedly state that the fact we are having a dialog about a process or how to think about financial assets is something that very few professionals are able to articulate. Why? Because to do so exposes the professional to look foolish if they get it wrong. When you get it wrong and you don’t look like everyone else, your job or business is at risk. Hence the saying, “Your clients will never fire you for holding IBM.”

I personally find this professional attitude weak and self serving at best and mentally fraudulent at worst. I won’t get into all of the conflicts and bad advice individuals receive from their “trusted advisors” at this time, but I will point out that such lazy, non-thinking approaches to managing your wealth (which is how most private client money is positioned) it is critical you, their client, understand what you are signing up for. You are signing up for the fact that at some point in the cycle you are going to lose 50% (give or take) of your financial assets. All of the colorful pie chart in the world will not hide that!

So, the question becomes can we build something that is better? “Better” is always a judgement of the client. However, when I am speaking about better, I am specifically speaking to consistency. While there are zero risk-taking portfolios that will be immune to draw-downs (unless you are Bernie Madoff), is it possible to create a disciplined process that shifts assets around based from quantitative approaches that attempt to capture risk when we want to and avoid risk when we don’t? We want to move the conversation from judgments of what is expensive or cheap (because that is opinion…or lying) to a dialog about what is the data telling us? Is it possible to avoid the landmines? Obviously, I believe you can. I not only believe, I know. I’ve experienced it.

From here, we can now transition into a process of identifying the what and when of buying and selling. This reminds me of the only J.M Keynes concept that has any application to my thinking, which is “when the facts change, I change my mind. What do you do?” So to identify “the facts,” one needs to be grounded in something - right? No fake news! So then what is our North Star going to be? What will our filter be to everything financial? By what method do we use as the basis in which to identify whether you go to the right or go to the left or turn around? At this point we’ve ruled out 90% + of all financial professionals who don’t even think in terms like this. It is my personal experience that their North Star with your money is “the market is open, so it is a good time to buy!” My other personal experience is that the few remaining professionals who don’t fall in that camp are more “dooms-day” minded advisors who are closet gold bugs. Their North Star is to base all financial assets in terms of gold. The problem with this approach is you are anchoring your sense of righteousness in something that is manipulated. So, my research has led me to understand that when you base your sense of “value” of one asset from the “value” of another asset, you are in very dangerous territory. Think residential home prices in 2007! The value of your home based on your neighbors home was terrific, right up to the point your neighbors home went into foreclosure. The point is you need something else to judge price.

My financial journey, which includes many mistakes, has led me to understand how assets are priced. The result is an economic compass if you will. All assets are price from changes at the margin in growth and inflation and thus profits. I have to give credit to most of this discovery to Ray Dalio. Ray Dalio is the very successful steward of capital at Bridgewater Associates, LP. So our North Star to successful investing is not derived from a thing like gold or real estate or whatever, but from an observation in the changes in these two easily observable economic data points - growth and Inflation.

So pictured above is our economic compass. If we are seeing the rate of change in both growth and inflation (like we are as I write this) decelerate, you would know that profits are in the SW quadrant. Conversely, if you are seeing the rate of change in both growth and inflation accelerating, you would know that profits are in the NE quadrant. Your investment allocation looks completely different when the profit cycle is taking a trip to the southwest vs. the northeast. In fact, if you maintain the same investment allocation when profits are cruising in the NE and now find profits in the SW - you will literally crush your portfolio. Each location on our economic compass will require a different investment mix. This is not based on how we feel or opinions, it is base on data. The military use a term called situational awareness. To strive for better and/or consistent results with your portfolio you need situational awareness. They say, “what the wise man does in the beginning, the fool does in the end.” Let’s use use more objective data and less subjective “opinion” or our feelings to deploy our portfolio resources. Approaching the capital markets with the aid of the economic compass will hopefully allow us to make decisions that are a little bit more wise and a bit less foolish!

Sincerely,

P. Franklin, Jr., CEO

All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.

Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.