The New 60/40 Portfolio: Bonds, Bitcoin, and Cash?

In Q3 of 2022, bitcoin outperformed most financial assets. Look at its competition from July 1 to September 30:

  • S&P 500 (SPX) — down 6%
  • NASDAQ (IXIC) — down 5%
  • Russell 2000 (IWM) — down 4%
  • 20-year US Treasuries (TLT) — down 12%
  • Oil (WTI) — down 27%
  • Gold — down 8%
  • Silver — down 4.5%
  • Euro — down 6%
  • Corn — up 8.5%
  • Bitcoin — up 1%

Not good but better than those other investments. “The corn” beat everything except actual corn.

I know, I know. It’s only one quarter. Q1 and Q2 sucked. Q4 could do much worse.

You might assume bitcoin will suffer more as the larger global economic slowdown takes its toll. I guess we’ll see. Early returns seem ambiguous, at best.

But what can you do? The Fed is trying to make you poorer, make your businesses less profitable, take away your jobs, and crush the value of the things you own.

(Their words, not mine.)

You could do worse than a 1% gain in the midst of tragedy.

No surrender, no escape

Even if you disagree with my characterization of the Fed’s own words, you have to acknowledge we’re in a tough spot. Woe to he or she who speculates on the “macro” environment.

There is not a single chart or model that predicts how bad things will get or how long they will last.

Europe is confronting an energy crisis and has almost certainly entered a recession. Japan’s currency is depreciating at the fastest pace in at least a decade. Nobody wants to buy England’s bonds except England itself.

Corporate debt markets may have severely mispriced the risk of CLOs ($1 trillion) and institutions may have too much exposure to junk bonds ($7 trillion). Rising interest rates, a stronger dollar, and waning global economic growth are sapping household budgets and squeezing profit margins. Shipping has fallen off a cliff.

Australia’s housing market is a toxic mix of variable-rate mortgages and dangerously high property values. Pakistan has to deal with a flood, food, and financial crisis all at the same time. Several governments seem on the brink of default.

US Federal Reserve Chairman Powell says “no pivot” but some Fed board members say they’ll ease up soon. The Bank of England went head-first into tightening mode, then flipped back to easing once their pension system started to collapse. China tried to put the brakes on its economy last year, inadvertently blew up its real estate sector, and now has to patch up the damage with stimulus, bail-outs, and government intervention.

And you think you’re going to find somebody who knows exactly what’s going to happen next? You might upend your finances to avoid one fate, only to set yourself up for another.

For example, oil prices cratered this summer. Then OPEC announced it will cut production in November, and crude’s moving up again.

You can’t win, can you?

Cash, bonds, and bitcoin

May I propose an approach that will surely ruffle the feathers of the 60/40 crowd and the “FIAT IS DEAD BUBBLE COLLAPSING” folks?

Split your money into cash, bonds, and bitcoin. Preferably, short-duration government bonds and actual bitcoin, not investment funds.

  • When bitcoin’s price falls, trade some cash for more bitcoin.
  • When bitcoin’s price goes up, trade some cash for bonds.
  • When bitcoin’s price goes up a lot, trade some bitcoin for cash. Preferably, when my plan says to do so.
  • When bond prices go down, trade some cash for more bonds.
  • When bond prices go up, trade your bonds for cash or, if the timing works out, let them mature and take the proceeds as cash.

That way, you win no matter what your government does. You can find opportunities in most financial conditions.

Mark, bitcoin? Really? You’re still shilling that PONZI SCHEME??

Ok, boomer.

If you know, no explanation is needed. If you don’t know, no explanation will suffice.

Mark, government bonds? Really? Collectively, bonds had their worst year in a generation — by some measures, it’s the worst in a century! They’re openly manipulated by governments, traded in opaque and highly leveraged markets, and nobody knows whether they’re rated properly!

Yes, all true, but you’re getting the best deal you’ve had in ages. And I’m only talking about government bonds, not corporate bonds. Corporate bonds are in a whole category by themselves, let’s keep it simple here.

Your government has every incentive to prop up or bail out the market should anything really bad happen. Sure, you have a little more risk than cash but if your government can’t pay its bonds, your cash will probably be worthless, too.

In the US, you can buy T-bills, treasury notes, and treasury bonds through TreasuryDirect. If you live in another country, you may need to go to a bank or dealer.

Bonds are like altcoin staking rewards, except you get paid in your government’s money.

If interest rates keep going up, you can roll over your bond at a higher yield. If interest rates fall or you find yourself tight on cash, you can sell your bond, possibly for a profit.

With a combination of cash, bonds, and bitcoin, you get the relative safety of government debt, the security of money in your pocket, and the long-term growth potential that you can only get from digital assets at these prices.

The Doombergers say otherwise

Yes, crypto sucks, it does nothing, no fundamentals, no intrinsic value, all scams, everybody loses money, nothing works. Government bonds are a sovereign debt bubble, they’re about to collapse, and the world’s financial system is whack. Cash is trash.

In life, bad things are no more guaranteed than good things. If you wait for the financial system to collapse, or any of the terrible things you read about in the news or extrapolate from data charts, you could be waiting forever.

Things can get worse. Times can get harder. Volatility and risk abound.

Expect this. Plan for it. Buy relevant insurance. Set aside money for other investments. Get advice from people with experience, not Bitmojis that post articles on the internet.

I use Personal Capital to help me build a financial plan that should weather most storms. Try their dashboard for free.

At the same time, realize that good people are working hard every day to keep bad things from happening. Often, they see the same risks that you do. They spend their entire lives trying to make our financial and monetary systems function.

Sometimes, they succeed.

The European Central Bank and US Federal Reserve opened new facilities for banks. Global institutions like the International Monetary Fund and World Bank have programs to support emerging market economies. Pakistan has international aid and smart, hard-working people dedicated to overcoming floods, food, and financial crisis. China’s interventions seem to have stopped the bleeding.

They might fail, but they might not. Humans are more brilliant, adaptable, creative, persistent, and industrious than you might expect.

Embrace uncertainty

Catastrophe looms behind every corner, in bull markets and bear markets, in times of prosperity and in times of hardship. Your capital is always at risk.

Does it seem reckless to put bitcoin into a financial portfolio as the world seems ready to fall apart, governments are clamping down on crypto, and the Fed is sucking liquidity out of everything?

Does it seem stupid to buy bonds when they’re losing value at the fastest rate in at least a generation?

Does it seem excessively cautious to hold cash while inflation runs wild pretty much everywhere?

I don’t know — and neither do you.

We know things will get worse before they get better. Until somebody can tell me when that is, at what price, and how long it will take to recover, I’m happy to hedge my bets.

And what if, by some bit of freakish luck, we get enough good things to offset the bad? World peace might break out at any moment. Stranger things have happened.

A recent PwC survey said half of US corporations plan to fire people in the coming months. What about the other half? What happens if they hire the people the first half lays off? What if small businesses pick up the slack?

What about the 5 billion people who don’t live in the US, Europe, or China? In some places, they face an economic situation worse than yours — but many small and middle-income countries are growing. India is having a banner year, though it’s questionable how much of that prosperity reaches the masses.

For every dismal indicator, you can find a mitigating factor.

Priya in the Park shouts “IT’S ALL A BUBBLE” and she’s right, but that bubble’s lasted for a generation already. It was supposed to pop in 2008, 2011, 2016, 2018, and 2020. It didn’t.

At some point, it will. How long will you wait — and how much will you lose–before it does?

The greatest investors of our age have all gotten zapped from too much exposure to one asset or one position. Soros, Drunkenmiller, Schiff, even Buffett.

They’re rich. It’s easy for them to get over it.

I’m not, so I can’t afford to take those kinds of chances. Maybe you’re in my shoes, too.

Get some cash, bonds, bitcoin, and chill until the world’s financial system gives people like us a chance to buy assets that aren’t overpriced, overvalued, and targeted for “demand destruction” by financial authorities that care more about their mission than our welfare.

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