Generational investors comprise the backbone of the US capital markets and asset classes. Now is the time for all Family Offices to come of age. Upon doing so, they’ll rightfully claim their seats at the US Capital Markets Defense (UCMD) round table alongside the four other generational investor groups:
- Sovereign wealth funds
- Swiss banks
- Pension funds
The generational investor breed is completely different than any other investor breed. Sheer size alone makes the generational investor comparable to a cruise ship making a hairpin turn to catch a fish in sharp contrast to a fishing boat. Often it is these quick responses that are required in the market when trading securities. Since the generational investor cannot effectively trade the market to produce cash, the majority of their assets are in investments that distribute cash to them, especially those within cash distributions steadily increase.
Coca-Cola is a prime example. It has been paying cash dividends since 1920 and has increased its dividend every year since 1963. The chart below depicts that Coca-Cola’s dividend payments increased from $1.02 per share to $1.76 per share from 2012 to 2022.
The table below depicts assets for five groups, that in aggregate have assets of $69.1 trillion. These five groups share the same mandate; to grow and preserve capital needed to provide cash to their constituents in the distant future. The groups and their members are the backbone of the US’ capital markets and asset classes.
The Family Office group, which consists of 7,300 Family Offices, has the second-largest portion, equivalent to 8.5% of all of assets held by generational investors. A high percentage of the assets held by Family Offices has been amassed in the 21st Century. According to Forbes, from 2008 to 2019, the number of Family Offices in the US grew by 10 times. The average assets held by a Family Office in 2019 were $765 million.
However, the average Family Office has a distinct disadvantage when compared to a Swiss Bank, Endowment, Public Pension fund, or a Sovereign Wealth fund for three reasons:
- Significantly less assets. The average Swiss Bank, Endowment, Pension fund, and Sovereign Wealth fund dwarfs a Family Office. Much larger asset bases of the average Swiss Bank, Endowment, Pension fund, and Sovereign Wealth fund enables them to afford full-time analysts and economists, etc. who monitor economic and secular investment trends to determine the best asset classes (stocks, cash, bonds, real estate, commodities, and precious metals).
- Less experience at investing for future generations. Endowments, public pension funds, and Swiss banks have centuries-old and time-tested disciplines and policies which preserve capital and reduce risk.
- Little, if any, secular bear market investing experience. A high percentage of all Family Offices in the US gained their stock market experience from investing during the 2009 to 2022 secular bull market. This has lulled them into a false sense of security that they are stock market experts. This is not the case and such overconfidence can be dangerous. This is clearly a disadvantage void experienced by some of the Family Offices. Some might say that is tantamount to a Third World dynamic experienced in the investment arena. Anyone can see the utter incongruency of this vis-a-vis, having the prowess to build wealth versus increasing it. Picking winning stocks during a secular bull market is easy as throwing a dart at the stocks in a newspaper.
- Free educational content about secular markets. (View videos at bottom of the page)
- Strategies for investing in declining, volatile, and secular bear markets
- Proprietary long/short algorithms that have outperformed the S&P 500 since 1871
- Ongoing research to determine asset class allocations based on economic and secular trends
Time is of the essence for Family Offices to move from offense to defense. The troubling findings from my research on inflation from 1871 to 2022; relative to how it affected the S&P 500’s PE multiples and dividend yields should startle every Family Office. The probability is high for the following bear scenarios:
- S&P 500 reached a high on 01/04/22 which will not be exceeded until 2030. The prediction is based on an analysis of the S&P 500’s historical PE multiple adjusted for inflation. See also, my 3/22/22, “Due to Inflation’s Effect on PE, S&P 500 to decline 45%”
- The secular bull market which began in March 2009 has ended. The bull was replaced by a new secular bear market which began at the S&P 500’s January 2022 high. Based on the behavior of the previous bears, the index will decline by 47% to 85%. The table below depicts the performances of the S&P 500’s secular bulls and bears since 1921. View secular bear market educational videos at the bottom of this article.
- S&P 500 could potentially decline by 83% because of its real dividend yield being negative. Research of the S&P 500’s real (inflation-adjusted) dividend yields from 1872 to 2020 revealed a high correlation between its dividend yield status and the index’s annualized return.
On 2/28/2022, S&P 500’s dividend yield was a negative 6.43% compared to its nominal dividend yield of 1.4%. A real yield is calculated by subtracting inflation from the nominal yield. See table below.
The table below contains all of the periods from 10/1879 to 12/1920, which experienced a minimum of 12 consecutive months of inflation. Inflation’s high for all qualifying periods was 23.67%. The S&P 500’s lowest dividend was a negative 17.78%. The cumulative S&P 500 loss for the periods was 60.4%. Also depicted in the table for each period:
- Peak inflation
- S&P 500’s lowest nominal dividend yield (DivY)
- S&P 500’s lowest real (negative) (DivY)
A sell S&P 500 when the index’s yield goes to negative discipline methodology was accurate for 4 of the 7 (57%) qualifying inflation periods in the above table. However, the win ratio does not accurately reflect the degree to which the methodology was accurate. The S&P 500 significantly outperformed the methodology only for the 10/1879 – 09/1880 period with a gain of 13.9%. For its two remaining positive return periods, its gains were 0.06% and 3.4%. The S&P 500’s cumulative loss for the negative dividend yield periods was -60.4%.
The table below contains the S&P 500’s notable positive and negative dividend yield periods from 1920 to 2021. For those periods within which the S&P 500’s dividend yield was positive, the gains ranged from 3.9% to 46.9% per annum. For the S&P 500’s negative dividend yield periods, the index’s returns ranged from a decline of 19.9% to a gain of 0.02% per annum. The 2018 to 2021 positive dividend yield period had a duration of 30 months and the annualized gain was 33.3%. March 2022, was the S&P 500’s 13th consecutive negative yield month since the dividend yield went from positive to negative in February 2021.
Research findings from analyzing the S&P 500’s dividend yields (Div/Y) from 1871 to 2022 led to AlphaTack’s development of AlphaCenturi, an algorithm which is either short or long on the S&P 500, 365 days per year. Since 1871 the average duration between an AlphaCenturi long and short signal has been 3.06 years. The “Alpha” in the algo’s name is for high performance. “Centuri” originated from its back tests and also because it outperformed the S&P 500 for the last three centuries. There were five Div/Y periods from 1871 to 2022, when AlphaCenturi was either long or short for at least 100 months. The table below contains the five periods.
Due to the extraordinarily long durations for AlphaCenturi‘s sell, or go short, signals a comparative analysis was conducted. The mandate was to determine the returns from selling short versus investing the sale proceeds into short-term savings accounts and interest-bearing notes, etc., at an average 2.4% per annum interest rate. The gains from following the more conservative interest-bearing strategy were 101% higher than following a long/short strategy. The chart below depicts that $100 invested into AlphaCenturi‘s S&P 500 Long/2.4% strategy increased to $1,079,789. $100 invested into a buy and hold S&P 500 strategy increased to $96,910.
AlphaCenturi has had a sell or short the S&P 500 signal since June 2021. The duration of its prior buy or long signal (December 2018-June 2021) was 30 months. The algorithm’s most fascinating signal, which had a duration of 162 months, was from 1920 to 1934. The gain for the signal, which encompassed the crash of 1929 and Great Depression, was 52.3%. The table below depicts AlphaCenturi’s win ratios, for its 49 signal changes, which occurred during the 150 years period.
It has been nothing short of amazingly singular to utilize 150 years of data, as far back as 1871, to conduct the back tests required to develop an algorithm having a 79.6%, win ratio. AlphaTack.com is a uniquely equipped advisor for all generational investors and especially the heads of families, who establish offices to preserve and grow the family’s capital for future generations. To understand my algorithm development cycle and the efficacy of an algo based on its back tests click here.
The telephone, which was invented in 1876, did not become ubiquitous until early in the 20th century. The only way to obtain information about the stock market in the late 19th century was by telegraph and the Pony Express. So then, how was it possible for consumer price data to have been utilized to predict the long-term direction of the S&P 500 in the late 19th and early 20th Centuries? Based on its back tests, AlphaCenturi outperformed the stock market for the 19th, 20th and 21st centuries. The only rational answer is the GENERATIONAL INVESTOR.
The NYSE was founded in 1792 to enable investors to buy shares in businesses that shared profits. What motivated investors to buy stocks in the late 18th, 19th and early 20th centuries was not trading shares for a profit. There was very little liquidity back then. The primary reason for an investor to remove their money from a bank and to buy shares was the business’ ability to pay cash dividends. Dividend paying stocks became the ideal asset class for Swiss Banks, who were the first generational investors.
For those periods in which the dividend yields were at or above the inflation rate, investors held their shares to collect cash dividends. During those periods in the 18th and 19th Centuries, when the inflation rate was above the dividend yield, investors sold their shares and collected interest from a bank savings account since inflation was followed by periods of significant deflation.
Investors did not adopt a “buy and hold” mentality until the middle of the 20th Century. To protect and grow capital from 1879 until the mid-1900s, an investor had to be extremely disciplined. CPI volatility was the cause of the US’ boom to bust economy. The table below contains the US’ most volatile CPI periods throughout the country’s history from 1882 to 1921. Periods of double-digit inflation were routinely followed by double-digit deflation.
The 1881-1913 chart below, which covers most of the chaotic inflation/deflation periods in the above table, also depicts the S&P 500’s volatility for the 32 year period.
The CPI volatility resulted in the US being rife with recessions and depressions from 1871 to 1913. The chart below depicts the US recessions (shown in grey) and the S&P 500 from 1871 to 1913.
Pioneer investors were baptized by fire. Because of a chaotic CPI from 1881-1913, they quickly learned that they could be whipsawed by investing in gold and real estate at the extreme inflation peaks, which were routinely followed by rapid CPI descents to deflation and stock market bottoms. During inflationary periods, they learned to get out of the stock market. For deflationary periods, which began at economy and stock market bottoms, they learned to sell real estate and precious metals and to invest in the three asset classes below:
- Dividend-paying stocks
The obvious question is: How did generational investors obtain timely Consumer Price Index data? The answer is that they did not need the data. Pioneer investors personally witnessed the extreme inflation and deflation from 1879 to 1913 as depicted in the above tables and charts.
The table below contains the performance of the S&P 500 for all 12 month minimum periods of deflation from 1882 to 1923. Peak deflation for the periods was -15.85%. The longest period, from 09/1882 to 01/1887, had 52 consecutive months of deflation. For the seven periods the S&P 500 gained a cumulative 44.5%.
November 1931 to April 1933, was absolutely the best period ever to buy US stocks. The PE multiples, according to the AlphaTack PE (AT/PE), were negative for 18 consecutive months. An investment in the S&P 500 at the 1931 high for the period resulted in a gain of 100% by 1936. The gain for an investment in June 1932, the S&P 500’s low for the 20th Century, was 293%. The negative PE, which can occur only during periods of deflation, indicates extreme undervaluation. To learn about the negative PE multiple, which is exclusively calculated by the AlphaTack PE (AT/PE), the only PE which adjusts for inflation and deflation, see my 3/22/22 “Due to Inflation’s Effect on PE, S&P 500 to decline 45%” article.
Note. The findings from empirical research of the S&P 500’s PE multiples adjusted for inflation and deflation from 1920 to 2022 led to a similar research initiative for the index’s dividend yields from 1871 to 2022. From the two research efforts, the projected decline based on the PE multiple was 41.9%, and the decline based on the dividend yield was 83.3%.
Correlation of the S&P 500’s negative dividend yield to the index’s underperformance fully supports my thesis that all investors, including generational, developed and honed disciplines from 1882 to 1920 because of the extreme market and CPI volatility for the period. Their disciplines enabled them to grow their assets and then protect them by regularly moving from the S&P 500 into cash or low yield equivalents.
The probability is very high that generational investors accounted for a majority of the investment capital and share trading volume for the US stock market from 1882 to 1920. The concept of a minority owner of a business receiving a share of the profits, i.e., dividend payments:
- was morally and politically correct at the time
- was a solid argument for Capitalism and against Communism and Marxism
- enabled a passive investor to receive steady and dependable income from a diversified pool of investments without having to own and manage commercial real estate and/or businesses, etc.
Research findings also indicated a high correlation for the S&P 500 reaching a significant bottom when its dividend yield went from negative to positive. The table below contains three of the S&P 500’s four most recent infamous bottoms. The 1982, 2008, and 2018 dividend yield status changes from negative to positive coincided at, or just prior to infamous S&P 500 bottoms. August 1982 is a very well-known secular bear bottom. When the most memorable crash for the generation of current investors occurred after Lehman Brothers went bankrupt in September 2008, the S&P 500’s dividend yield went from negative to positive in November of 2008. Finally, the Christmas Eve low for the year 2018 was a classic that will live in infamy.
*1968 and 2018, in the above table are also infamous. They are the rare years in which S&P 500 declined sharply after making a new high in the same year. The infamous highs coincided with the index’s dividend yield going from positive to negative, obviously!
The chart below depicts the aggregate market value of all US stocks from 1998 to 2021. The pink shaded areas depict periods within which the S&P 500’s yield was negative. The aggregate value of all stocks performed well for most of the periods, especially from 2009 to 2018, iwhen the S&P 500’s yield was positive and underperformed for those periods in which the yield was negative.
My research findings are overwhelmingly conclusive. The extreme highs and lows for the S&P 500 since 1871, and in the future, will continue to be set by generational investors, who are by far the world’s longest-term investors. The investors, who have $69 Trillion of assets (see chart below) invest in the stock market, primarily to receive real or inflation adjusted dividend income. Since their $69 Trillion of assets exceed the $53.4 Trillion valuation for the entire US stock market at 12/31/21, the generational investors comprise the backbone of the US’ capital markets and asset classes.
“It’s the highly disciplined investors who determine the bottoms and the tops for a stock or an index.”
Generational investors have a core discipline; to be in cash and cash equivalents until the S&P 500’s dividend yield goes from negative to positive. It is not prudent to have assets at risk when dividend yields are below the inflation rate. The core discipline poses a big problem for the S&P 500 when volatility increases. For those significant corrections that occur when the S&P 500’s yield is positive, the dividend-yield-oriented investors utilize the cash they receive from dividends to buy additional dividend-paying shares. For those significant corrections that occur when the S&P 500’s yield is negative, their cash is not utilized to buy additional shares. Thus, it’s very logical that highly disciplined and yield-oriented investors should determine the bottoms and also the tops for a stock or an index.
The bottom line is that when the S&P 500’s dividend yield is negative, the index does not have a floor between the level it is trading at and the level it must decline to for its dividend yield to be positive. Because of the absence of support from the generational investors at the marginally lower levels, the probability is high that the initial 41.9% to 47% decline has begun. A decline that will eventually take the S&P 500 to 83% below its January 2022 all-time high.
The findings from my research of the S&P 500’s PE multiples at the index’s extreme highs and lows indicate that the S&P 500 reached a high on 1/4/2022; which will not be exceeded until 2030, at the earliest. The findings from my secular bear market research indicate that the S&P 500 will decline by a minimum of 47%. The decline is in the same ballpark as the decline of 41.9% for the S&P 500, based on the AlphaTack PE (AT/PE) of 13.4, which is the average AT/PE at all of the index’s extreme lows from 1929 to 2020. A read of my 3/22/22 report “Due to Inflation’s effect on PE, S&P 500 to Decline 41.9%” is highly recommended. This article contains my full analysis on the effect that inflation and deflation have had on PE multiples from 1920 to 2022.
Any rational reader of this report would deduce that the probability is high for the S&P 500 to continue to decline after it has declined by 41.9%. For a further decline to much lower levels to be mitigated, the S&P 500’s dividend yield MUST GO FROM NEGATIVE TO POSITIVE, and the sooner, the better.
There are five ways, or any combination thereof, for the S&P 500’s dividend yield to go from negative to positive:
- S&P 500 declines to 802.03, an 83.3% decline from 1/4/2022 high.
- S&P’s 500 member companies increase their dividend payouts by several hundred percent
- Inflation declines from 7.9% to 1.3%.
- CPI volatility increases and Inflation is replaced by Deflation
- Federal Reserve raises discount rate from 0.50% to above 7.9% inflation rate
It would be catastrophic for the S&P 500 to decline by anything close to 83%. The probability would be high for the US to have its first economic depression since the 1929-1939 Great Depression.
The ideal way for the S&P 500’s dividend yield to increase without the index having to decline by 83.3% would be for all of its members to significantly raise their cash dividend payouts. However, the probability of that happening without the US Congress intervening is low.
The Federal Reserve cannot raise rates fast enough to prevent an 83.3% decline for the S&P 500 without inducing an immediate recession. The chart below depicts the discount rate and all recessions (vertical gray bars) from January 1950 to March 2022. All but one of the recessions, March 2020, subsequently occurred when, or soon after, the Federal Reserve raised its discount rate.
The red circle at the far right of the above chart shows that the Fed’s discount rate at 0.50% has nowhere to go but up. After each of the prior recessions depicted within the chart began, the Federal Reserve was able to lower its discount rate. Should a recession begin for whatever reason, the Federal Reserve does not have the option to lower rates to stimulate the US economy.
A recession, which could easily evolve to become the first depression since 1929-1939, is not likely to be caused by the Fed raising rates. It is highly probable that it will be caused by the S&P 500 being unable to recover from its initial 41.9% decline. Soon thereafter, the decline would continue until the S&P 500 declined by 83.3% from its high. The multi-year trip to the 2023 or 2024 bottom would mimic 1929’s trip to July 8, 1932, the S&P500’s 20th Century low.
Since inflation has been steadily climbing and is now permeating the fabric of US and global businesses, the Federal Reserve and the world’s other Central banks are powerless to stimulate their economies. They are forced to raise rates to combat inflation and can-not lower the rates to invigorate their economies since US and global interest rates are presently near all-time lows.
The extended economic contraction, caused by the 83.3% decline, will be a carbon copy of the 1929-1939 Great Depression. It sunk its teeth into the US economy because of the crash, which began in 1929, not ending until 1932. See Stock Market Crash of 1929: Definition, Facts, Causes, Effects (thebalance.com).
A collapse of all of the world’s stock markets is inevitable, and barring a miracle, could occur by 2023 at the earliest. The conditions for a steep recession or the first US economic depression since 1929 are now firmly in place.
The US Federal Reserve can not stop a significant US economic contraction from happening. The Fed, which was established in 1913, was unable to prevent the first (1920) and second (1929) US Great Depressions from occurring. In fact, revered US economist, Milton Friedman, blamed the Federal Reserve for causing the 1920 Great Depression. Below is the excerpt from Wikipedia:
“Milton Friedman and Anna Schwartz, in A Monetary History of the United States, consider mistakes in Federal Reserve policy as a key factor in the crisis. In response to post-World War I inflation the Federal Reserve Bank of New York began raising interest rates sharply. In December 1919 the rate was raised from 4.75% to 5%. A month later it was raised to 6%, and in June 1920 it was raised to 7% (the highest interest rates of any period except the 1970s and early 1980s).”
What was revealed after the facts contained in Friedman and Schwartz’s white paper cited above were researched was that the Fed’s raising the discount rate from 4.75% in November 1919 to 7.0% in June 1920 did not quell inflation. In June 1920, inflation reached the US’ all-time ever high of 23.67%.
After the catastrophic decline and ensuing third Great Depression for the US has occurred, the US Federal Reserve Bank and all of the world’s other Central Banks will have lost all credibility. Politicians and governments will never allow them to be trusted again. History will disclose the failure of the “World’s grand 1913-2022 Central Banks experiment”. The failure will have everlasting repercussions: capitalism and the economic policies of the US will be challenged. Twenty-first-century communism will be considered a viable alternative by many of the world’s countries.
The removal of the Fed would result in an increase of the inflation and deflation volatility, which will rival the CPI volatility for the US during the late 19th and early 20th centuries. The chart below depicts inflation (gold) and deflation (pink) and the S&P 500 from 1881 to 1913. The S&P 500’s average per-annum gain for the period was 0.70%.
The chart below depicts inflation, deflation and the S&P 500 from 1913 to 1951. For the period the S&P 500’s average per-annum gain was 4.4%.
The chart below depicts inflation, deflation, and the S&P 500 from 1951 to 2022. For the period the S&P 500’s average per annum gain was 29.8%. Analysts and economists attribute the S&P 500’s much lower CPI volatility and higher per annum gain for the S&P 500 to the additional powers granted the Federal Reserve in 1951.
The chart below is the Federal Discount rate for the same 1951 to 2022 period. The chart depicts that the Federal Reserve discount rate was 1.50% in 1951. The rate was raised to 1.75% in January of 1951 and to 2.0% in October of 1953. The rate was then lowered to 1.50% in February 1955. A starting point of 1.50%, gave the Federal Reserve the ability to meaningfully reduce the rate, should the US economy slow, which is what occurred. As a result of the discount rate starting point at March 31, 2022, being 0.50% and much lower than in 1951, the Fed is not in the position to make a meaningful rate reduction in the event that the US economy slows. Thus, this has increased the risk for a significant and prolonged US economic contraction.
Summary of the Federal Reserve:
- Does not have the option to lower rates should a recession begin.
- Was completely incapable of doing anything to prevent the first (1920-1921) and second (1919-1939) US Great Depressions.
- Has not been 100% successful when using its raise-the-discount-rate strategy to reverse inflation. See above findings from research of Friedman’s white paper again.
The only thing the Federal Reserve has proven is that it has the policies and tools to rebuild an economy after it has been severely damaged, as was the case from 1951 to 2022. Therefore, even assuming the Fed will not be removed, the only way for the Fed to be effective is for a 1929-1932 style decline of the S&P 500 to occur, and to be followed by a severe economic contraction.
The probability for a substantial draw down for the S&P 500 and all US stock market indices is high. Family offices and all investors should immediately begin to prepare for the extreme volatility of US stock market, economy and CPI (which is inevitable) by doing the following:
- View 90/10 crash protection strategy video at bottom of page
- View secular bear market educational videos at bottom of page
- Liquidate all blue-chip shares, mutual funds and Exchange Traded Funds
- Liquidate commercial real estate
Cash should be invested in any or all of the following:
- US government 2-year treasury notes*
- Long/short hedge funds**
- Hedge/venture capital funds**
- Private technology startup and early-stage companies**
- Select microcap companies and penny stocks**
The chart below depicts the performance of AlphaTack’s Bull & Bear Tracker which gained 232% vs. 60% for the S&P 500 from March 2018 to March 2022. The Bull & Bear Tracker is an ideal secular bear market investment vehicle since it fully leverages extreme volatility. The three yellow shaded areas on the chart depict the algo’s gains vs. the S&P 500’s declines for the 2018, 2020, and 2022 volatile periods. For more information about BBT go to www.alphatack.com
Upon deploying the defensive strategy, a Family Office will have the liquidity to invest in the dividend-paying stocks recommended by AlphaTack.com when the S&P 500’s dividend yield goes to positive from negative. Thus, many of the US’ Family Offices will have “Come of Age”, rightfully claiming their seats alongside the other generational investors at the US’ Capital Markets Defense (UCMD) round table.
|Video No.||Secular Bear Market educational videos||Run Time|
|N/A||What is the difference between a secular bear and a cyclical bear?||4:35|
|N/A||Why the minimum duration for a secular bear is 8 years||1:15|
|N/A||Secular bull investing strategies do not work during a secular bear market||2:12|
|N/A||Why the worst performing stocks during a secular bear were always the best performers of prior secular bull||1:36|
|N/A||Proven Secular Bear investing strategies||10:28|
|N/A||AlphaTack, Secular Bear Investments Lifeboat||2:03|
|N/A||90/10 Crash Protection Strategy||3:31|
Michael Markowski, a 45-year financial markets veteran, is the Director of Strategies for AlphaTack whose slogan is “growing assets against the wind”. He conducts empirical research of the past which he then utilizes to develop algorithms to predict the future. His research of Enron’s Financial Statements after its infamous bankruptcy led to the development of a Cash Flow Statement algorithm. The algorithm was utilized to predict a “day of reckoning” for Lehman, Bear Stearns, Merrill Lynch, Morgan Stanley and Goldman Sachs in a September 2007, Equities Magazine article. Michael’s research of prior market crashes led to the development of the Bull & Bear Tracker (BBT) algorithm. From 2018 to 2022, the BBT gained 209% vs. the S&P 500’s 56%. His predictions of all periods of heightened market volatility from 2008 to 2020 and the S&P 500’s exact March 23, 2020 bottom are media verified.