Sunday, December 29, 2019

The OK Boomer decade

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The "Ultimate Market Timing Model" is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, "Is the trend in the global economy expansion (bullish) or contraction (bearish)?"

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don't buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.

The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities*
  • Trend Model signal: Bullish*
  • Trading model: Bullish*
* The performance chart and model readings have been delayed by a week out of respect to our paying subscribers.

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Is demographics really destiny?
'Tis the season for strategists to publish their year-end forecasts for 2020. Instead of participating in that ritual, this is the second of a series of think pieces of what might lie ahead for the new decade (for the first see China, paper tiger).

It is said that demographics is destiny. Tom Lee at Fundstrat recently highlighted changes in spending and debt patterns. As the Baby Boomers age and fade into their golden years, the Millennial generation is entering its prime and they are poised to seize the baton of consumer spending, and eventually, political leadership.

Demographics is destiny holds true only inasmuch as people's desires at different ages are roughly the same. But their desires are constrained by financial circumstances. The combination of a generational shift and differences in financial circumstances has profound implications for the political landscape, policy, and investing.

I believe that the coming decade is likely be the "OK Boomer" decade that sees a passing of the baton to the Millennial cohort characterized by:
  • A greater focus on the effects of inequality
  • A political shift to the left
  • There are two policy effects that can be easily identified:
    1. The rise of MMT as a policy tool
    2. The rise of ESG investing
The question of whether these developments are good or bad is beyond my pay grade. However, investors should be prepared for these changes in the years to come.

The full post can be found here.

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