Welcome to the ETF Program. The ETF Program is an investment program that combines active macro alpha and strict risk control, all in an easy-to-follow solution for individual investors.
To today’s note. Our observations are as follows:
Macro assets continue to show inflation dominating cross-asset price action, with commodities leading and fixed income falling.
The business cycle remains in an expansion, pressures on monetary policy to tighten have risen, and capacity utilization remains strong.
A procyclical allocation looks attractive, but with inflationary tilts.
Let’s begin sharing the data that drives our current assessment of the macro regime and our subsequent risk management and positions.
Basic Trend Program
Trend following is a good solution for many investors, as it is intuitive and provides solid risk control. However, the signals used in trend following are fairly basic, so we don’t think there should be a high barrier to entry for basic trend-following strategies. As such, we will provide access to a Basic Trend Program at zero cost to users for a portfolio of Stocks, Gold, Bitcoin, and Bonds. The program uses three layers of portfolio construction: a risk-parity base, a two-speed trend overlay, and a 15% maximum volatility cap. These layers are applied versus a benchmark beta of 60% Stocks, 15% Bonds, 15% Gold, and 10% Bitcoin. We will release a methodology note soon, but in the meantime, we share the summary statistics and current positioning below:
This program currently has a 100% max long position in Stocks, a 50% max long position in Bonds, a 100% max long position in Gold, and a 50% max long position in Bitcoin.
In risk-parity terms, this translates to Stocks: 41%, Bonds: 31%, Gold: 17%, Bitcoin: 5%, and Cash: 6%. This reflects an expected volatility target of 11%.
Please note that these positions do not directly reflect the Prometheus trend measures, which are relevant to our proprietary and paid programs. The positions in our Basic Trend Program use an equal split between 1-month and 6-month trends. We share the Prometheus trend gauges for each asset below. We begin with stocks:
Equity trends have snapped back to positive. Next, we turn to bond market trends:
Bond market trends remain negative. We now move on to broad commodity aggregates:
Commodity trends remain extremely strong amid geopolitical tensions. Next, we examine our macro trend signals for Gold:
Gold trends are now neutral. Finally, we examine our trend signals for Bitcoin:
Bitcoin remains in a downtrend.
While basic trend following is a strong solution for many investors, there is a world of signals and strategies beyond it. We begin to address these in the following sections.
Macro Cycle Program
Our systems aggregate a wide range of fundamental economic data to produce timely, proprietary estimates of the current stages of the macro cycle. This process has navigated this year quite well thus far:
We visualize the simulated path of using this process below:
We share some of the underlying gauges driving these allocations, starting with our signals for business cycle conditions:
Our latest readings continue to indicate an expanding business cycle. Next, we turn to monetary policy pressures. Our monetary policy gauge measures the pressures on the Federal Reserve to move monetary policy based on the trade-off between growth and inflation data. The higher our readings, the more pressure there is to hike policy rates. The lower the gauge, the more pressure there is to cut policy rates.
Pressures on monetary policy to tighten have further increased due to the energy price shock. Next, we turn to measures of economic tightness. Our gauges of manufacturing tightness tell us whether the economy is running up against capacity constraints when its readings are high, or when there is a significant amount of economic slack when readings are low:
Our latest readings show that manufacturing capacity utilization is rising. Combining these indicators, a Macro Cycle Allocation would be
