Hope you are having a great fall and Halloween. My wife sent me a TikTok of drones that now fly around like ghosts. We're definitely getting one to scare kids for trick-or-treating when we're back in the U.S.
A few changes to the monthly letter. There will now be a free section and a paid section each month.
The free section will be a stand-alone section consisting of the investment framework based on Charles Gave's excellent work that I like to use as a map, my core portfolio based on this, and then a piece I read each month and observations of how it fits into events around us for protecting my family and capital.
We all have enough demands on our time each month, so if you're someone who wants the broad strokes and one piece to read, that is the free section. You also get an idea of what the letter is about so you can decide if this is for you.
For those already in the paid section, you still get everything you enjoy about the letter.
After the paywall, there will be the PDF of the letter and the plan is to start having an audio recording of it as well in the future. We’ll see if it me reading the letter or my wife. Maybe both of us: she can read it, and when she asks me a question, that gives me a chance to explain it better. If an audio version is something you really want, let me know either in the Discord or at [email protected].
Next section behind the paywall will be Field Notes. The last couple of months, recounting conversations with Haroon have gotten a lot of positive feedback. If you enjoy those kinds of stories, they'll be at the front of Field Notes when I have one to tell.
The stories are real, the details mostly trustworthy, based on my memory of conversations and events. After that, Field Notes will finish with other pieces I've read this month and observations of how they fit into what I am thinking for protecting my family and capital.
Then will be the personal portfolio with any updates that month, and finally the Lifestyle section, since what good is money if it doesn't make my life more beautiful? The Lifestyle section is personal reviews of things I find that do exactly that. It could be a bottle of wine, a trip, a supplement regimen, a new folding Japanese landscape saw, sunglasses, basically anything I find focused on high quality.
Ok, let's get started.
"The war was launched without a clear rationale and with a constantly shifting set of objectives—from changing Tehran's regime and squelching its nuclear ambitions to, more recently, reopening the Strait of Hormuz, which wasn't closed until the war started. The results, not surprisingly, have been bad both for U.S. interests and for the Middle East."
"As our ability to project power around the globe becomes more formidable, we desperately want to believe that geography is no longer important. As new media allows us to see national outrage among an adversary's population, we desperately want to believe that we can spur change with little risk or commitment. And as AI speeds up tactical decision-making, we desperately want to believe that the lessons of military experience can be disregarded. These beliefs are illusions."
The same day Admiral McRaven said the results of the Iran War has been bad for U.S. and Middle East interests, U.S. Ambassador to Türkiye and envoy for Syria, Tom Barrack put an even blunter point on the limits of American power in the Middle East at the Doha Global Security Forum:
"Owning doesn't work. Controlling hasn't worked... So the bargain is not to own but to tend."
For the last month we’ve been told by everyone from the Secretary of War to the Financial Times that the flow of energy in the Middle East is back to prewar levels. This was not accurate. UKMTO has been reporting ship transits remain 70% below prewar levels while VLCC day rent rates went from $30,000 prewar to at one point $1.4 million per day before coming back down to $600,000 per day.
It doesn’t cost $1.4 million per day to transit a strait that is open and protected by the U.S. Navy.
Meanwhile Ansar Allah and the Islamic Resistance in Iraq have continued to show why fixed infrastructure is not a viable bypass to a maritime chokepoint within range of drones and missiles as they lay siege to the House of Saud. Their accurate drone and missile strike packages are cutting MBS’s cashflow, energy production, energy transfers, shipping, and air travel by striking airports to ground Saudi air support.
We’re not going to go deep in it here, but MBS has a serious problem. The hundreds of people he locked in a hotel and extorted to consolidate power inside Saudi Arabia who have seen their subsidies cut.
How much does he have in reserves compared to ongoing subsidies and expenses before he has to see just how liquid his U.S. investments actually are while he is sending a delegation to Tehran?
If the U.S. is serious about stepping back and selling energy instead of guaranteeing delivery, what does that mean for MBS in Saudi Arabia? Saudi Arabia only became a country under western patronage, before that it was a vassal to the Ottomans. As land powers continue to dictate terms to maritime powers at maritime chokepoints and the U.S. is no longer interested in owning or controlling the Middle East, we’ll see if Saudi Arabia ends up as Persia’s vassal this time.
How the House of Saud goes, so goes Bahrain and Qatar, and U.S. 5th fleet and Al Udeid Air Base. Which frames the Qataris buying long term U.S. LNG contracts and going to Tehran in a different light.
The Qataris have been working a long time to align their interests with U.S. energy export interests, become a global LNG supplier and diversify from the strait of Hormuz. So if they lose Al Udeid and can make a deal with Iran to keep ballistic missiles from hitting multi-billion dollar, highly flammable and fragile energy infrastructure at Ras Laffan, does it really hurt them?
For individuals, I don’t see how this doesn’t continue to be inflationary.
Secretary Bessent's 3-3-3 plan of adding 3 million barrels per day (mbpd) of domestic energy supply to keep long term inflation expectations lower didn’t survive the first missile exchange hitting energy infrastructure in March. Energy prices are one of the most important indicators of long-term inflation expectations. Energy infrastructure and shipping are now being targeted in two theaters while the U.S. is is saying they will no longer guarantee delivery but sell energy after starting a war. Everything is downstream from energy, so if energy prices stay high then the cost of everything goes up.
Investment Framework
Flirting with Inflationary bust quadrant with Gold/10-year U.S. Treasuries above and S&P500/Oil below their 7-year moving average. This is based on Charles Gave’s work on Harry Browne’s Permanent Portfolio. I use it like a map for understanding how the world is voting with their money and which of the four quadrants we are currently in. The General Theory of Portfolio Construction.
Core Portfolio
$2 million treasury bond equivalent in the form of pension, spouse survivor benefit, and healthcare, with cost of living adjustment tied to CPI. I use the 10-yr TIPS to estimate the treasury bond equivalent. This factors into why I don’t hold any U.S. treasury bonds in the core portfolio below.
I have $800k in federal life insurance that will wipe out the mortgage if I am killed since my career is high risk and most private policies won’t pay out for conflicts. I also have an umbrella insurance policy with USAA. A lesson I took from my great-grandmother during the Depression when my great-grandfather was killed in a car wreck is since their house was paid off, my great-grandmother was able to make it through the depression renting rooms in her house. If anything happens to me, my wife will have no debt, paid off house, and at least three streams of income from renting the loft in the house to traveling nurses, survivor benefit, and investment income.
Your situation will be different, but all of the above factors into my core portfolio.
I am looking for a few key things with the core portfolio. Every dollar has to have a job. I’m managing risks, taxes, volatility, and legacy in one account. This portfolio is designed to handle three monetary regimes well: growth, stagflation, and inflation. It will not handle deflation well. That is fine, the foundation above covers stability and income in deflation if needed. Besides I don’t think anyone is willing to actually take the pain from deflation. There’s too much debt and everyone seems determined to make someone else pay. Biggest thing for me is having enough liquidity to never be a forced seller in volatility. I use cashflow to rebalance which is more tax efficient.
One change I’m making with the above from previous months, I am bumping up the target on gold to 20% and taking down U.S. equites to 25%. Will DCA with cashflow over time.
IVV – 25%, U.S. equity core
IXUS – 25%, diversified global equity
GLDM – 20%, gold for inflation and diversification
XLE – 10%, energy
JPST – 10%, stability sleeve, liquidity and limited rate sensitivity
SGOV – 10%, cash reserve and optionality
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