The needs for diversification

First of all, I wish everyone a happy new year. Since my last blog on Bitcoin and Crypto on Dec 18, the bitcoin (BTC) price has jumped from $23,000 to $36,000 and Ethereum (ETH) price has jumped from $650 to $1200. The momentum is there and the trend should be bullish this year, although it could be worthwhile to take some profit if you are a short term trader

Since the stock low in March of 2020, the US market is becoming a casino. The liquidity filled bubble has reached a historic proportion. It is justifiable to a certain degree: since the interest rate is almost zero or even negative, there is no alternative but to invest in the stock market. But this risk-off magnitude reminds me of the 1999 internet bubble where stock swings widely with double-digit gains and losses without any true fundamental reason. This is the season for caution.

If you follow this site for a while, you know we are quantitative investors. Lately, the historic quant model does not seem to work well anymore with zero interest rate and data distortion from the momentum traders. From a macro perspective, we have to go back to the 1940s to see the parallel interest rate and deficit environment or “long-term debt cycle” as Ray Dalio calls it. The market can always find reasons to move up or down based on the momentum, but over time, the stock market is a weight machine, not a voting machine.

The world is more likely to change from a US-centric, one country domination, to multi-regional ecosystems. We will likely see 3 major blocs of trading ecosystems, with satellite resource-driven economy countries such as Russia, Australia, middle east block to align in the middle.

So from a portfolio perspective, it is essential to diversify US dollar investments to include multiple regional coverages. Also, because the US dollar dominance might be broken in the next few years, in addition to stock regional diversification, it is worthwhile to diversify into hard assets or alternative assets from resources to precious metals and bitcoin. Overall the system risk is much higher than before. What we will likely see are more divergence of assets (the continuation of K-Shape Recovery), a higher probability of black swan events, and the death of risk-free returns.

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