Before Chris Cole’s construction of the mysterious “Dragon Portfolio”, investing in time’s of US dollar strength and weakness seemed to be impossible to achieve simultaneously.
Especially if you don’t know if the economy is headed for inflation or deflation, in order to plan better investing.
But now you can figure out how to invest during inflation, deflation, and a recession.
What’s even better, this strategy will do well even in an economic collapse!
In this article, I explain in a detailed manner the hawk portion of the Dragon portfolio.
Step #1: Chris Cole's Dragon Portfolio
First, let's go over a recap of Chris Cole's dragon portfolio we’ve discussed before. If you don’t know what the dragon portfolio is, you can click here to learn more.
Our charts run in cycles. Chris Cole calls these cycles hawk or serpent, as shown in the image.
A serpent cycle starts off very strong due to:
- A free-market economy
- Technology and
But then at the end of the cycle, it becomes very corrupt with crony capitalism, a massive expansion of debt, and of course, money printing.
Then the hawk cycle comes in and wipes the slate clean. It gets rid of all the malinvestment and the misallocation of resources, and then it issues in another serpent cycle.
This chart starts in 1928, and goes all the way to today's date. On the left-hand side, starts at a dollar, and goes all the way up to $48.
So starting off in 1928, if you would have had $1 in Chris Cole's dragon portfolio, at the end of this hawk cycle in 1946, you'd have $6.
You can see during every cycle, regardless of whether it's a hawk cycle or a serpent cycle, the dragon portfolio performs extremely well. Especially from 1965 to 1983 when we had an inflationary hawk cycle.
And looking at these pie charts, you can see how the dragon portfolio is extremely unique.
On the left-hand side, a normal portfolio has:
- 73% equities
- 21% bonds
- 7% cash.
But then we go over to Chris Cole's portfolio:
- 24% equities
- 18% bonds
- 19% gold
- 18% commodities trend following.
- And…This is where it gets interesting: 21% long volatility.
Step #2: The Hawk Cycle – The Deleveraging Phase
Let's take a deeper look at the hawk cycle. This is the de-leveraging phase where we're most likely in right now, and we'll be in for the next decade.
Chris Cole describes this as the left-wing of the hawk and the right-wing.
The left-wing is a deflationary de-leveraging, and the right-wing is an inflationary de-leveraging. Chris Cole has some charts in his report that go over this beautifully.
They're a little tough to read so I tried to simplify them here in my whiteboard.
The Left Deflationary Deleveraging Wing
As examples, we'll use charts from the Great Depression from 1929 to 1932, and the recession that followed in 1937 to 1938.
These charts represent the equities market, which means the stock market.
It indicates the number of months the de-leveraging lasted, from one month all the way to 37 months, and on the left-hand side, it goes from zero up to 1.5. So this is what a dollar invested would have done during that time period.
We'll start from 1929 to 1932, and I've made this chart a lot simpler than Chris Cole's. In Chris Cole's Chart, you can see how it goes up, and down, but it’s a little tough to read, so I just made it a straight line in my whiteboard.
In 1929, if you would had $1 invested, 35 months later, that dollar would have been down to 50%.
Keep in mind, both these charts are in nominal terms, nominal numbers. They're not adjusted for inflation.
From 1937 to 1938, you would have lost almost the same amount, but in a much shorter timeframe, only about 15 months.
The Right Inflationary Deleveraging Wing
The right-wing of the hawk chart specifically was extremely interesting to me. Check this out:
We start with the months below from two months to 38 months, and on the left, we start at the top with $1 invested.
It goes down to about 0.5 or 50 cents, so this is what your dollar would have done if invested in the stock market during this timeframe.
From 1972 to 1974, there was a period of stagflation. So inflation in the United States was running at 6, maybe 7%, and the stock market went down in nominal terms, not inflation-adjusted, nominal terms by almost 50%.
Even in the stagflation between 1976 and 1980, the stock market was pretty much flat.
So what this tells us is that inflation doesn't always equal asset price going up.
This takes me back to what I've said: Inflation and deflation are extremely nuanced. It's not binary.
And the only times throughout history where we've always seen asset prices go up is in times of hyperinflation.
The example Chris Cole uses in this chart is Weimar Germany from 1919 to 1923.
So how can this help you build an investment blueprint for your own portfolio for an inflationary cycle, deflationary cycle, or a recession?
To be clear, the dragon portfolio is set up for the longterm. This is a portfolio for a hundred years.
So regardless of what happens, what season, what cycle, you're going to do well over the long run.
But if you're looking at just the next five or ten years, look at the hawk cycle.
What's great about this portfolio is you don't have to make a decision whether we're going to go into inflation or deflation, because parts of the portfolio that are meant for the de-leveraging work regardless of whether it's an inflationary de-leveraging or a deflationary de-leveraging.
In other words, it works regardless of whether or not we're going into a left-wing hawk cycle or a right-wing hawk cycle.
Before we continue, I want to point out something I think is extremely important: A chart of the S&P 500 in nominal terms.
We can see it going all the way back to 1932, taking it to today, that it pretty much goes from left to right straight up without a hitch.
Even if you look at the 1970s specifically, it looks like it just went down a little bit and went right back up and kind of flat all the way to the end of the decade. But if you zoom in and look at what really happened and try to put yourself in the position of an investor psychologically, emotionally in the 1970s, we see a much different picture.
Here's the S&P from 1970 to 1980:
It looks anything but flat! Can you imagine being on this wild ride?
Starts off around 90, then plummets all the way down to say 73. I know it doesn't sound like a big move, but in percentage terms, it would have been huge.
Then from 1970, it skyrockets all the way up to 116, and then comes crashing down again to under 65, and then right back up to call it 105 in 1980.
It looks like a roller coaster when you zoom in, but when you zoom out and look at it over the span of 90 years, it just looks like a little blip.
So my point is, whenever you're looking at the charts, regardless of whether it's the S&P, whether it's commodities, precious metals, bonds, whatever it is, look at the full historic view. But then look at it decade by decade, and definitely in percentage terms, nominal terms and real terms adjusted for inflation. That's the only way you can get the entire picture.
Step #3: Specific Ideas For Your Personal Investing Blueprint
These ideas will help you survive and thrive in a cycle of inflation, deflation, and a recession. We know for sure that Chris Cole's dragon portfolio is a great starting point for all of us.
What makes it unique from normal portfolios is the hawk portion, or the portion that does well in a hawk cycle, at de-leveraging.
This portion includes:
- Long volatility
- Commodity trend following
For gold, I'll assume most of you know how to invest in that or Bitcoin, whichever you prefer. Commodity trend following, a little more esoteric, but it's not impossible. It's pretty easy.
There are several books out there on how to do it, such as The Turtle Traders.
But the long volatility portion of the dragon portfolio is what most people really struggle with. There's no easy way to do it.
There are ETFs that are long volatility like the VIXY, but unfortunately, they almost always have a negative carry, just like USO, where they have to buy futures and roll them over when the futures' curve is in contango, meaning the spot price is lower than the future prices. They always lose money over time.
To understand this further, read the definition Investopedia provides:
“VIX ETF positions tend to decay over time as a result of the behavior of the VIX futures curve. As this decay takes place, these ETFs have less money to use to roll into subsequent futures contracts as existing ones expire. As time goes on, this process repeats itself multiple times and most VIX ETFs end up losing money over the long term.”
Since we're looking at our portfolio in cycles of a minimum of 10 years, we definitely don't want something that's going to have a negative carry, so the VIX ETFs are out.
The other option is to invest in Chris Cole's fund. If you're an accredited investor, I definitely suggest checking it out. Artemis Capital is the name of his fund.
However, for most people watching this video, those are not realistic options, but I will get into specific ideas for the average Jane and Joe.
Specific Ideas For The Average Jane And Joe
So what can average Joe and Jane do?
I suggest you start by looking at trends
If we go into a de-leveraging, regardless of whether it's an inflationary or a deflationary de-leveraging. Here are the key trends I recommend you to follow:
- Society as a whole is going to become poor, especially the retirees. We have this glut of the population retiring, the baby boomers.
If we go through inflation, they're going to struggle because their social security checks aren't going to keep pace with inflation. If we have a deflationary cycle, their 401ks will definitely take a hit and their pensions will most likely go bust.
- Social unrest. We've seen this growing all over the world, and I think it's only going to get worse in a de-leveraging cycle.
- We also want to focus as investors on capital preservation more so than capital appreciation. If you can get the appreciation, fantastic. But when you go into a cycle like this, your focus should be on maintaining your purchasing power.
Now let's dive into other more specific ideas that I came up with. I had a lot of help from my community on Twitter.
So if you're not following me on Twitter, make sure you do so just @GeorgeGammon. This is more American centric, but I think you can get some good ideas.
2. Buy some farmland
I did some research and I saw that in the UK during the Great Depression farmland did well. It also did very well in the 1970s.
I also know farmland did well in the United States in the 1970s and in the1930s.
3. Trailer parks
For obvious reasons, as a society, if we're getting poor, we still need a roof over our head, so people are going to look for the cheapest option possible.
4. Payday loans
Unfortunately, the unemployment rate is extremely high for a long period of time, which means more and more people are going to need this type of service.
You know what they say, when we go into a recession, the things that do well are alcohol and cigarettes.
I think moving forward, you've got to throw in cannabis as well. I know a lot of these stocks have been in a bubble, and I'm not saying with any of these that you go out and buy them right now, I'm personally just putting them on a watch list.
So if they do get cheap, I know I can go in and buy them because I want to hold them for the next 10 to 20 years.
Or any auto parts store, not saying they're cheap now, but I think if we go into a recession or a de-leveraging, regardless of whether it's inflationary or deflationary, fewer people are going to be able to buy new cars. They need to work on their own cars and AutoZone, O'Reilly's, that's the place you go.
On the same note as AutoZone, if we're really struggling economically, people are going to need to sell some things maybe to put food on the table, keep a roof over their head, send their kid to school.
In the old days, we'd go to a garage sale. Nowadays you go straight to eBay to not only buy things cheap but to sell things to get cash in your back pocket.
8. Coal and uranium
I know this may sound a little weird, but if we go into recession or depression, I think the last thing on politicians' minds is green energy.
I'm not saying this is right or wrong. All I'm saying, if society is getting poor and we're really struggling economically, we're going to look for the cheapest, most efficient energy source possible, and as you guys know, coal and uranium are extremely cheap right now.
Bonus: Outside the box ideas
Buy XYZ real estate
This means buying properties in:
- South America
- South-Eastern Europe
Just anywhere outside the United States, where that culture sees real estate as a safe-haven asset. Not only that, you've got a boomer Bill who's retirement checks are getting smaller and smaller as far as their purchasing power, and moody millennial who can't find any opportunity in the United States.
So what do they do? Maybe they go to Mexico. Maybe they come to Colombia because the cost of living is so much lower. People can improve their standard of living.
I've seen it down here in Medellin the last couple of years firsthand. I can't even tell you how many retirees I see moving down here constantly.
And whenever I go to a coffee shop, prior to Covid-19, they were just packed with millennials on their computers trying to make money online with a side hustle. Whatever it is, they're trying to get outside of the United States to find more opportunities.
Now, we head over to the SSMGP, just like the Fed we have to have a four or five letter solution for everything.
2. SSMGP: Super Smart Macro Guy Plan
I saw a video the other day, an interview that was fantastic on Real Vision between Raoul Pal and Hugh Hendry, who I just interviewed for my channel.
If you haven't seen that interview, make sure you do so. But I found very interesting the way they look at volatility in their own portfolio and in their own lives.
What I mean by that is both Raoul and Hugh have moved to very small islands in the Caribbean. Hugh moved to St. Barts, Raoul moved to Little Cayman.
In their discussion when they're talking about volatility and how to structure a portfolio, they both say that that's one of the main drivers for them moving to one of these small islands.
They bought real estate there, especially in Hugh's case, it's a positive carry assets. This means it's a positive cash flow. He's getting paid to own it. So they take out super cheap, fixed-rate debt.
They have a hard asset, in Hugh's case, it has a positive carry, and they're outside of the insanity bubble.
Meaning that regardless of what happens in the world, even the Covid-19, they've got an additional level of freedom.
As an example, I'm here in Medellin in an apartment and they will not let you leave. You're on a government lockdown. It absolutely sucks, but Raoul and Hugh are off on a beach.
There are very few people around. They're on a big piece of property, so they can go outside, they can relax, they can get some sun.
Hugh can go surfing while I'm sitting here in Medellin, in a city, in a metropolitan area, stuck in my own apartment.
I know this doesn't directly pertain to investing, but it does pertain to personal freedom, and at the end of the day, that's why we're trying to increase our purchasing power.
So we have more personal freedom to do the things we want to do when we want to do them.
So taking this back to the United States, maybe it's not realistic for you to buy a property on a Caribbean Island, but hey, maybe you want to get outside of the city, get out of the urban area and buy a rural property.
Maybe a little farm, a house where you can grow your own food, you can get outside, get some sun and exercise, if we go through another round of the COVID.
But more importantly for the next 10, 20 years, if we do have social unrest, or if we have this insanity bubble, it will most likely be focused in the cities.
Therefore you remove yourself, you increase your personal freedom, and at the end of the day, like I said, that's what it's all about.