“The real secret to investing is that there is no secret to investing.” --Seth A. Klarman

UP YOUR ASSET ALLOCATION (February 6, 2022): Surprisingly few people recognize how dramatically the financial landscape has changed during the past year. Exactly one year ago the vast majority of global assets were in bull markets. Today, more than 40% of all Nasdaq shares have dropped over 50% from their 52-week highs while most global stocks, high-yield corporate bonds, cryptocurrencies, NFTs, and perhaps even real estate have been in downtrends. Some oversized percentage pullbacks have created worthwhile bargains at various points in recent months.

I have shifted my equity short:long ratio dramatically toward the long side while remaining 2:1 short to long.

My current total as of the close on Friday, February 4, 2022 was long 20.636% and short 42.13%, or almost exactly 1:2, not counting TLT. If the bear market continues for large-cap U.S. growth shares as I expect then I will likely be more long than short before the end of 2022. I list the exact percentages at the bottom of this essay.

TLT has become very unpopular as investors don't trust a forty-year bull market.

One of my very first investments was purchasing long-dated U.S. Treasuries in 1981. At that time there was a nearly unanimous consensus that U.S. Treasury yields would keep climbing indefinitely due to permanently high inflation and soaring budget deficits. Each year, often more than twice per year even in the early 1980s, there was a proclamation that the bull market for the 30-year U.S. Treasury had ended, and we have continued to experience this gloom and doom each year since then including right now. On Friday, February 4, 2022, TLT dropped to 138.78 at 10:52:28 a.m. Eastern Time. I made my most frequent purchases of TLT on Friday since it had been even more depressed during the late winter and early spring of 2021. The longest-tenured writer at Barron's, Randall W. Forsyth, penned a bullish column about long-dated U.S. Treasuries which is the lead article in this week's print edition and can be found below:

Contrarians Indeed: Two Seers See Lower Rates, Bond Boom

The online version has the same essay but a different title: "Forget About Inflation. Contrarians Expect a Recession and a Drop in Bond Yields." It is probably not a coincidence that The Economist has the following cover story:

How High Will Interest Rates Go?

Many investors confuse the Fed's overnight lending rate with long-term yields.

If we are heading toward increasing recessionary expectations, as the flattening U.S. Treasury yield curve has been telling us, then this would mean higher short-term yields and probably lower long-term Treasury yields to create additional flattening. I plan to keep buying TLT into weakness because it could be one of the top performers as it has been in the past whenever investors have gone from almost zero expectation of a U.S. recession, like now, to a majority of investors expecting such an economic slowdown.

U.S. housing prices may have begun to drop following a more extreme bubble in 2021 than we had in 2005-2006.

The price of the median U.S. house dropped about 34% following the housing bubble we had sixteen years ago. Average valuations were even higher in 2021 by Case-Shiller and many other reliable measures, so the overall pullback is likely to be greater. The U.S. Fed's data for new home prices experienced its first pullback in a long time:

Numerous sectors had become especially compelling in recent weeks including GDXJ, KWEB, and XBI.

In addition to my very recent buying of TLT, I have been accumulating GDXJ, KWEB, and XBI into weakness. GDXJ is a fund of mid-cap gold mining shares; this sector had been one of the largest percentage winners following the collapse of previous U.S. growth-stock bubbles in 1929, 1972, and 2000. KWEB is a fund of Chinese internet companies which has one of the highest ratios of profit growth to price-earnings ratio for any U.S.-listed exchange traded fund. XBI is a fund of biotech shares which recently had more than a 1.5 to 1 ratio of profit growth to price-earnings, according to the sponsor's web site, and which had also featured significant insider buying of several of its components. XBI and GDXJ traded near two-year lows while KWEB had fallen to a five-year nadir. T (AT&T) is sharply out of favor partly over confusion about its upcoming spinoff and related uncertainties. I plan to continue to purchase all of the above into either lower lows or higher lows, especially whenever we are experiencing dramatic net outflows from these and related funds along with continued above-average insider buying relative to insider selling.

Too many investors are waiting for nonexistent triggers.

Extreme deviations from fair value in either direction are sufficient reason for dramatic price changes to occur. People often ask "what is going to trigger a huge drop for QQQ" or "what will cause Chinese internet shares to rebound?" I often answer these kinds of questions with this question: what caused U.S. internet companies to collapse after 1999-2000? What caused the crash of 1929? What caused stocks worldwide to surge in the late winter and early spring of 2009? The answer in all three cases is that, even with years or decades of hindsight, there were no obvious triggers to either of these major trends. Any irrationally huge deviation from fair value will always resolve itself sooner or later.

The bottom line: we have dangerous overvaluations for large-cap U.S. growth shares combined with compelling bargains for several other sectors. Now is a good time to combine long positions in unpopular assets and short positions in the trendiest shares.

Disclosure of current holdings (most recent purchases in red):

Here is my asset allocation with average opening prices adjusted for dividends/splits and newly-opened positions in boldface: 43.6% cash including I Bonds paying 7.12% guaranteed (available to anyone with a U.S. social security number), TIAA Traditional Annuity paying 2.758% to 3.519% (for legacy retirement accounts), and Discover Bank high-yield savings paying 0.50% (available for all U.S. residents with retirement and ordinary savings accounts); 18.0% short XLK (112.7737); 17.3% long TLT (147.86); 15.9% short QQQ (309.7504); 6.4% short TSLA (494.9721); 5.9% long GDXJ (39.68); 5.0% long GEO (7.52); 2.54% long GDX (28.98); 1.68% long KWEB (35.19); 1.32% long EWZ (27.33); 1.23% long TUR (17.17); 1.05% long ASA (19.49); 0.90% short AAPL (125.5481); 0.74% long XBI (86.14); 0.62% long ECH (22.98); 0.53% short IWF (223.0119); 0.40% short SMH (170.7813); 0.27% long T (23.33); 0.12% long UGP (2.565); 0.10% long ITUB (3.83); 0.052% long BBD (3.39); 0.014% long TIMB (9.99). It doesn't add up to 100% since short positions require less cash; there is no margin involved.

“To buy when others are despondently selling and to sell when others are avidly buying requires the greatest of fortitude and pays the greatest ultimate rewards.” --John Templeton

INFLATION'S GYRATIONS (December 4, 2019): When I wrote my last update on August 7, 2019--I will try not to wait so long before the next one--the media were obsessed with the inverted U.S. Treasury curve, the insistence that we were headed for an imminent recession, and the "certainty" of continued all-time record low long-term U.S. Treasury yields. Practically all that anyone debated in August was when a U.S. recession would arrive and how much lower long-dated U.S. Treasury yields would drop as a result. After falling to all-time lows on August 28, 2019, yields on the 10-, 20-, and 30-year U.S. Treasuries have been rebounding. All of a sudden almost no one is worried about a U.S. recession any more. The 4-week U.S. Treasury no longer has anywhere near the highest yield in the entire Treasury curve as had been the case in the late summer.

Investors have shifted within four months from an obsession with recession to an even more absurd overconfidence in ever-rising U.S. asset valuations.

During recent weeks we have experienced some of the most intense net exchange-traded fund inflows in history along with rare extremes of optimism in surveys which date back several decades. Daily Sentiment Index on Wednesday, November 27, 2019, the date of the exact top for the S&P 500 and the Nasdaq and even the Dow Jones Industrial Average, showed 89% of futures traders who were bullish toward the S&P 500 and 91% who were bullish on the Nasdaq Composite Index--and only 26% bulls toward gold. On the exact day when I had written my last update on this site on August 7, 2019, the American Association of Individual Investors (AAII) reported only 21.7% of investors who were bullish toward U.S. equities while 48.2% had been bearish. 2019 year-to-date net inflows for U.S. exchange-traded funds set a new all-time annual record with several weeks to go, surpassing last year's peak which had been the previous high-water mark by a wide margin. Investors who shunned U.S. equities by making substantial net outflows when the S&P 500 had been below one thousand in 2008-2009 have since been making massive net inflows with the S&P 500 near and above three thousand. Selling low and buying high, as usual, is unfortunately what usually occurs in real life. After an extended pullback assets look the most dangerous whereas they are actually the safest and most rewarding. Buying an asset after it has already gained 373% (from 666.79 on March 6, 2009 to 3154.26 on November 27, 2019) will tend to be considerably less profitable than buying it before it has done so. Psychologically an asset which has been climbing for more than a decade appears to exude superiority and safety when it is maximally dangerous to be long. Conversely, an asset which has suffered an extended decline as energy shares have done during the past two years makes it seem to be intrinsically inferior and dangerous when it is maximally safe and rewarding.

Small- and mid-cap U.S. companies are continuing to resist all attempts to regain their 2018 zeniths.

Throughout 1929 small- and mid-cap shares mostly never reached their highs from 1928 even while large-cap shares mostly did so; U.S. stocks thereafter suffered their worst percentage losses in history. Throughout 1972 and into January 1973 U.S. small- and mid-cap shares couldn't recover their 1971 highs while the largest-cap "Nifty Fifty" names kept climbing; this was followed by the biggest stock-market plunge since the Great Depression. Very few investors know or care that the New York Composite Index which has existed for decades has still not regained its January 26, 2018 top, while the Russell 2000 has not set a new all-time high since August 31, 2018. The most severe bear markets in U.S. history all have in common an extended period of underperformance by smaller and medium-sized companies relative to their large-cap counterparts. The markets are telling you loudly and clearly what is going to happen next; all you have to do is respect history and listen.

The U.S. dollar index climbed to its highest point since May 2017 and has begun a major multi-month decline.

The U.S. dollar index completed a top of 99.667 on the first trading day of September 2019 which was nearly regained on the first trading day of October. Until it had recently been surpassed by speculative bets on higher U.S. asset valuations the most overcrowded trade worldwide was betting on a stronger U.S. dollar versus nearly all global currencies. The theory was that the U.S. economy, while far from perfect, was the cleanest dirty shirt in the laundry. This is a badly soiled theory which relies heavily on the spin cycle, since the only thing truly dynamic about the 2%-growth U.S. economy has been its outperforming U.S. assets. Whenever any sector outperforms investors tend to invent nonexistent reasons for its having done so along with projections of unending future gains; recent extended losses will lead to nonsensical explanations about "why" any asset has retreated and why it will keep dropping in price. No one wants to admit that something has become far above or far below fair value just because herds of stupid investors have been irrationally crowding into or out of any given asset.

Energy shares remain compelling bargains with most of them having dropped by more than half since their respective January 2018 highs.

Energy shares not only went strongly out of favor but have had among the greatest losses of all sectors since their respective January 2018 peaks and are even farther below their elevated highs of June 2014. Most energy shares have lost more than half their value within less than two years. Exchange-traded funds in this sector which I have been gradually buying at first into lower lows and during the past two months into higher lows include all of the following: XES (oil/gas equipment/services), FCG (natural gas producers), OIH (oil services), and PSCE (small-cap energy). PSCE has slid from its June 2014 top by (53.37 - 5.95) / 53.37 or more than 88.8% which makes it among the worst-performing non-leveraged funds in any category over the same time period. This is because both energy and small-cap shares are simultaneously out of favor, making this a rare double play on these unpopular concepts. Other funds in this sector include RYE (equal-weight energy) and IEZ (oil equipment and services). All of the above funds have been forming higher lows for various periods of time. Before assets rally sharply higher they almost always discourage investors by creating a bottoming pattern consisting of a deep nadir followed by a sequence of progressively higher lows. Instead of being encouraged by the higher lows, investors perceive these as a sequence of failed rallies, and therefore often end up doing net selling when they should be gradually buying into all higher lows.

One worthwhile individual energy name is MTDR (Matador Resources). This little-known company is geographically surrounded by two large giants which might eventually initiate a takeover. Even if that takes years to occur, insiders including CEO/founder Joe Foran have been persistently buying near and below 14 dollars per share including the past several trading days.

I have sold most of my developed-market equity funds and a modest percentage of some emerging-market equity funds if they have a strong positive correlation with U.S. equity indices.

We are likely in a period where U.S. assets including U.S. equity indices will mostly experience corrections exceeding 20% over the next several months. During the same time interval the U.S. dollar will usually be retreating. I have been selling a large percentage of the Western European, Japanese, and related securities which I had mostly purchased at depressed prices when they progressively slid toward their Christmas 2018 bottoms. Often I have been selling these on the exact days when they have achieved favorable long-term capital gains or shortly thereafter. The stronger their positive correlation with U.S. assets, the more essential it has been to keep selling these into strength--especially into all sharp short-term rallies.

I had also bought many emerging-market securities which had mostly bottomed in October 2018 and made higher lows in December 2018. I have retained assets such as PAK, GXG, ECH, ARGT, along with my funds of commodity producers and related assets such as GDXJ, COPX, and REMX--and anything where a falling U.S. dollar will have a much more positive impact than the negative drag of sliding U.S. assets.

Investing Tip #1: respect insider activity.

In each update starting today I will include a fundamental concept of my investing strategy which is a combination of value and behavioral methods. I try to combine the best ideas of value giants including Benjamin Graham, John Templeton, Seth Klarman, and Ray Dalio, along with behavioral concepts from Howard Marks, Daniel Kahneman, Amos Tversky, and Gerd Gigerenzer. I gladly steal others' ideas since they are so often better than my own.

Top executives, especially those in certain companies, tend to have a proven track record of far outperforming median investors. One key reason is that they know exactly what is going on with their companies so if they are buying their own company's stock with their own money it must be meaningful. Another reason is that insiders are classic value investors. They don't fret about the concerns of amateur investors such as what will happen next week, what the media are saying, whether they are buying "at the bottom," or their average purchase price. They don't do lump-sum trading: they keep gradually buying when valuations are the most in percentage terms below fair value while gradually selling when prices are the most above fair value. Insiders couldn't care less whether they are raising or lowering their average purchase price. They don't do swing trading, don't use stops, and could care less about breakouts or moving averages. Investors would be wise to follow their example.

Insider activity is the most meaningful when numerous executives of different companies within a single sector are simultaneously buying or selling in unusually intense total U.S. dollar volume. During the past half year energy executives have smashed all-time records of insider buying including their aggressive gradual accumulation during the past several trading days.

Summary: the two most irrational extremes today are 1) underpriced energy shares and 2) overpriced U.S. assets.

When I wrote my last update investors were illogically obsessed with an imminent recession and had zero fear of inflation. Today recessionary concerns have almost disappeared but investors still don't realize that inflationary expectations are set to sharply surge higher. Investors have become dangerously complacent about the downside risks for U.S. assets, being far more afraid about missing out on future gains for U.S. equity indices than they are about the possibility of losing money. As always, capitalize upon investors' herding behavior by acting before they realize what is really going on.

The bottom line: keep buying energy shares into additional higher lows while selling U.S. assets into lower highs.

Tax-loss selling has been especially rough on energy shares and could potentially continue through the end of December 2019. Meanwhile, investors encouraged by their 2019 gains will periodically create upward surges for U.S. assets including equity index funds, high-yield corporate bonds, and related assets. Keep buying energy shares into higher lows and selling U.S. assets into rallies.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ, 4-week U.S. Treasuries yielding 1.649%, the TIAA-CREF Traditional Annuity Fund, SIL, XES (some new), ELD (some new), FCG (some new), SEA, SCIF, OIH (some new), PSCE (some new), ASHS, GDX, VNM (some sold), ASHR (most sold), bank CDs, money-market funds, GXG, I-Bonds, URA, SLX, PAK, EPOL, EZA (some sold), ECH, LIT, HDGE, TUR (some sold), FM (some sold), EPHE (some sold), MTDR (some new), EGPT, REMX, FXF, COPX, WOOD, ARGT, GOEX, BGEIX, NGE, EWW (some sold), AFK, RSXJ, FXB, EWM, GREK (some sold), EWG (most sold), EWU (most sold), EWI (most sold), JOF (most sold), EWD (most sold), EWQ (most sold), EWK (most sold), EWN (most sold), RGLD, WPM, SAND, SILJ, IDX (some sold), CHK.

I have a significant short position in XLI, a moderate short position in SMH, and a modest short position in CLOU. My cash and cash equivalents including bank CDs and stable-value funds (fixed principal, variable interest) comprise just about exactly 30.0% of my total liquid net worth.

"Those who cannot remember the past are condemned to repeat it" (George Santayana). "Those who can remember the past but insist that it's different this time deserve to repeat it" (Steven Jon Kaplan).

I expect the S&P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bottoming pattern occurring with frequent sharp downward spikes perhaps during the final months of 2020 and into the first several months of 2021. During the 2007-2009 bear market, most investors by Labor Day of 2008 still didn't realize that we were in a crushing collapse, and I expect that at least until around the middle of 2020 most investors will similarly persist in believing that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and most other small- and mid-cap U.S. equity funds have persistently underperformed their large-cap counterparts except before sharp rebounds; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, 2000-2002, and 2007-2009. The Nasdaq in 2018-2019 never quite achieved its March 10, 2000 intraday zenith in inflation-adjusted terms and has thereby completed a historic long-term double top. A two-thirds loss from its recent zenith would put the S&P 500 near 1050 and I believe that its valuation will become even more depressed at some unknowable level below one thousand; eventual widespread fear over how much further prices will drop is likely to be accompanied by all-time record investor outflows from most U.S. equity index funds and U.S. high-yield corporate bond funds before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all major U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than U.S. equity bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next historic bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.

“The hardest thing over the years has been having the courage to go against the dominant wisdom of the time, to have a view that is at variance with the present consensus and bet that view.” --Michael Steinhardt

INFLATION BEFORE RECESSION: BUY ENERGY SHARES (August 7, 2019): The media have become obsessed with the belief that the U.S. economy is heading for an imminent recession. A primary flaw in this reasoning is that U.S. equity bear markets for more than two centuries have followed a reliable pattern in which events occur in a certain sequence. This order of operations has a resurgence of inflation occurring well before the U.S. economy experiences negative GDP growth which defines a recession. There are other elements in this sequence which are also consistent and which are repeatedly misinterpreted by investors each time we are in a new U.S. equity bear market, including rallies for commodity producers beginning with precious metals and usually ending with energy. Investors foolishly conclude that "it's different this time" and then the same patterns repeat yet again.

The first, second, and now the third primary stages of a U.S. equity bear market are proceeding precisely on schedule.

On August 31, 2018 the Russell 2000 completed its all-time intraday zenith at 1742.0889. When this index of two thousand out of 3600 U.S. companies began to persistently form lower highs in September 2018 while the S&P 500 continued to set higher highs, it was beginning a pattern which has characterized all major U.S. equity bear markets throughout history. While the Russell 2000 did not exist in 1929, most small- and mid-cap U.S. stocks persistently underperformed their large-cap counterparts from roughly Labor Day 1928 through Labor Day 1929. This was followed by the worst bear market in U.S. history with losses averaging seven out of eight dollars by the ultimate nadir in July 1932. The same pattern repeated several decades later when large U.S. companies including the S&P 500 Index continued to climb into January 1973 while most baskets of small- and mid-cap companies had peaked in 1971-1972. This was followed by the worst bear market since the Great Depression. A dozen years ago the Russell 2000 completed a double top on June 1 and July 9, 2007, while the S&P 500 didn't top out until October 9, 2007 and the Nasdaq reached its cycle high on October 31, 2007. Overall the Russell 2000 during 2007-2009 dropped 60.0% while the S&P 500 slid 57.7% from top to bottom.

Small- and mid-cap U.S. companies have been far underperforming their large-cap counterparts for nearly one year.

The situation during the past year has been eerily similar to the severe past bear markets listed above. From their summer 2018 highs to their Christmas 2018 lows, the Russell 2000 dropped by (1742.0889-1266.9249)/1742.0889 or 27.3%, while the S&P 500 only lost (2940.91-2346.58)/2940.91 = 20.2%. The first pullback in a bear market is almost always followed by a strong rebound, and both of these indices recovered--but by very different margins. The S&P 500 repeatedly set new highs in 2019 until it achieved a new all-time top of 3027.98 on July 26, 2019. The Russell 2000 never got anywhere near its prior-year high, only reaching 1618.37 and doing so on May 6, 2019 to continue its pattern of peaking ahead of the S&P 500 and at significantly lower highs. My essays regarding this topic on SeekingAlpha.com drew derision from some who were either ignorant of history or who refused to believe that this kind of underperformance was a reliable signal of a severe bear market. The recent sudden slide has finally gotten some people to realize that, alas, we could be in some kind of downtrend after all. The media have created the illusion that the latest U.S. stock-market pullback was caused by Trump, tariffs, earnings, employment data, and other allegedly unpredictable events. However, the Russell 2000 has been screaming loudly and clearly that a major loss would have to happen relatively soon. Because valuations were so much higher in 2018-2019 than they had been in 2007, the overall percentage losses will be proportionately greater, probably exceeding two thirds from top to bottom for nearly all U.S. equity indices. However, most of these losses will occur during the final months of the bear market, and not before several other key developments occur which I will list below.

The U.S. dollar just began to retreat from its highest level since May 2017. As the greenback grinds lower, this will be inflationary rather than recessionary. A U.S. recession won't occur until the U.S. dollar begins to sharply rebound from multi-year lows versus most global currencies.

The U.S. dollar has generally acted strongly, reaching 98.932 on Tuesday, August 1, 2019 which marked its most elevated point in over 26 months. The strong U.S. dollar has encouraged investment into all U.S. assets including stocks, corporate bonds, Treasuries, and real estate, while discouraging investment into commodity-related assets and non-U.S. stocks and bonds which tend to correlate inversely with the greenback. Just as bear markets reliably feature small- and mid-cap U.S. stocks underperforming large-cap shares, they also tend to experience substantial losses for the U.S. currency versus most other global currencies during the middle of the bear market. During the 2007-2009 bear market which began with the Russell 2000's first peak on June 1, 2007, the U.S. dollar index slumped to its all-time bottom of 70.698 in March 2008, and after briefly rebounding, retreated again to complete a double bottom at a slightly higher low in July 2008. Thus, the greenback moved dramatically lower for roughly one year. During this time all of the following occurred: commodity producers were among the world's strongest equity sectors; many emerging markets rose while U.S. stocks mostly moved lower; and inflation--which was widely considered in the middle of 2007 to be subdued and irrelevant--became unexpectedly widespread.

The major inflationary bout of 2008 has already been forgotten by most investors, and almost no one recalls similar surges in years including 1973, 1948, and 1937. The same phenomenon is about to occur again as precious metals are warning us.

By the final months of 2007 gold, silver, and related assets had been climbing strongly since June 2006 but their message was generally ignored. In early 2008 agricultural prices rose so suddenly, and by hundreds of percent apiece. My local bakery posted futures charts for the only time in their history on their front window to show customers that they weren't profiting from their sharply higher prices. In India they actually banned the export of rice until they discovered that tons of rice were rotting in warehouses. By July 2008 almost everything else had been soaring in price including a new all-time peak for gasoline and most energy products. In the current cycle, after having fallen to a 2-1/2-year bottom on September 11, 2018, precious metals and their shares have been among the top-performing sectors. This has significant inflationary implications which so far have been muted largely because of the strong U.S. dollar. As the greenback retreats, inflationary pressures will become increasingly evident and will eventually crowd out the current obsession with an imminent recession. Before we have anything resembling negative U.S. GDP growth we will have consumers complaining about high prices for gasoline, food, and many other essential goods and wondering if the inflationary spiral will get much worse.

During the current phase of the U.S. equity bear market the biggest percentage gains often occur in whichever commodity-related and emerging-market assets have become the most depressed and oversold.

Energy shares have become among the least popular areas for current investment. Exchange-traded and closed-end funds in this sector including XES (oil/gas equipment/services), FCG (natural gas producers), OIH (oil services), and PSCE (small-cap energy) are enormously below their respective January 2018 highs with many of them losing over half their value. Several of these are commission-free with some brokers including RYE (equal-weight energy) having zero commissions with E*TRADE and Schwab while IEZ (oil equipment/services) and FENY (energy index) are commission-free energy funds at Fidelity. Only alternative energy funds including TAN (solar) and FAN (wind) have been relatively strong, almost certainly due to the increased popularity of "green" investing strategies. As the prices of energy shares have experienced extended pullbacks, many investors have been selling primarily because they see others selling and as their persistently sliding valuations make them emotionally seem to be inherently inferior. This has encouraged huge net outflows from most energy funds. At the same time, top corporate energy executives recognize the irrationally low prices and have been making the most intense insider buying in this sector since their previous deep bottoms of late 2015-early 2016 and late 2008-early 2009. No matter how many times in the past energy shares have doubled or more during their periodic bull markets, investors inevitably conclude that "it's different this time" and only participate after most of the gains have already been achieved.

The traders' commitments for natural gas show an unusually rare commercial net long position--observe the dramatic shift indicated by the maroon bars in the following chart:

Traders' Commitments, Natural Gas

Commercials are those who actually use an asset in their line of business, versus speculators and other investors who only use it for trading.

Numerous other non-precious commodity producers have also been trading not far above multi-year lows.

Other exchange-traded funds of commodity producers including COPX (copper), REMX (rare earth), LIT (lithium/battery), and WOOD (timber/forestry) have become simultaneously depressed, and I have been gradually accumulating these for the first time since around Christmas 2018. Insiders have been buying at these producers including executives with proven long-term track records of making money on these trades including FCX insiders. The traders' commitments for copper highlights a sharp shift toward the commercial net long side in recent months:

Traders' Commitments, Copper

Numerous other sectors also tend to rally at this point during a U.S. equity bear market, usually for somewhat less than one year overall.

Other exchange-traded funds which tend to rally strongly when the U.S. dollar is retreating and when the Russell 2000 is mired in a lengthy bear market include SEA (sea shipping) and SLX (steel manufacturing) along with many emerging-market stock and bond funds. Country funds including NORW (Norway) and GXG (Colombia) correlate positively with energy prices due partly to their above-average concentration in the energy industry.

No worthwhile investment lasts forever, but rising inflationary pressures are likely to continue into somewhere around the middle of 2020.

When top corporate insiders aggressively buy into any sector, as energy executives have been doing, they do not expect a rapid recovery and a quick profit. They must hold their shares for more than six months in order to qualify for favorable treatment. Timing is always unknowable, but it is likely that energy shares and other inflation-loving assets will rally--with several sharp pullbacks whenever momentum players have recently chased after any of these--until the late winter, the spring, or possibly the early summer of 2020. Watch the U.S. dollar's behavior, insider activity, and net fund flows as valuable clues as to when to sell. Eventually the U.S. dollar will begin to rebound unexpectedly from multi-year lows versus most currencies, while top executives become heavy sellers of their shares and several funds enjoy huge net inflows. This will signal that the most knowledgeable participants are getting out just as the public--as always--eagerly piles in during a major topping pattern. Just as you will be buying energy shares now when everyone you know is bailing out of them, you will be closing out your positions when your friends are asking you which ones you own because they don't want to miss out.

U.S. stocks, bonds including corporates and Treasuries, and real estate will all mostly move lower during the upcoming year and then except for U.S. Treasuries will plummet dramatically lower during the following year.

During most of the upcoming year, nearly all U.S. assets including stocks, corporate bonds, Treasuries, and real estate will choppily decline significantly more than most investors are currently anticipating. This won't have anything to do with recession, but due to these assets having become irrationally popular and very overvalued relative to historic norms. The only time in history that U.S. real estate was more overpriced in some regions was in 2005-2006 and prices have already been falling--in some cases for more than a year--in an increasing number of U.S. neighborhoods. U.S. stocks overall were only higher in relative terms at the very end of 1999 and the beginning of 2000, while U.S. high-yield corporate bonds have never been more overpriced than they had been in July 2019. One defining feature of the upcoming year is how U.S. assets of all kinds will be moving lower except during swift rebounds from intermediate-term bottoms, while they are gaining in most other parts of the world and in commodity-related sectors.

Long-dated U.S. Treasuries will likely decline sharply for roughly one year as the current recessionary obsession is replaced by fears of continued inflationary increases.

The yields on the 10-, 20-, and 30-year U.S. Treasuries have plunged to absurdly low levels due to misplaced concerns about an imminent U.S. recession. As investors progressively realize that inflation is a more serious presence and that the anticipation of recession had been premature, the Treasury curve will steepen while long-dated U.S. Treasury yields will likely climb to multi-year highs at some point during 2020. This means that we will have substantially higher U.S. 30-year fixed mortgage rates which will put additional downward pressure on current overvalued and mostly unaffordable U.S. real estate.

Starting sometime in 2020 we will experience the worst part of the current bear market, probably continuing into some part of 2021.

Beginning sometime around the middle of 2020 and continuing probably into the first several months of 2021, assets worldwide will mostly plummet except for a tiny number of safe havens including the U.S. dollar and U.S. Treasuries.

Summary: eventually we will suffer a severe recession, but first inflation has to run its course.

Between now and roughly the spring of 2020, global equities and commodity producers will mostly climb--some quite sharply--while U.S. stocks fluctuate in both directions while mostly losing value. The current correction for U.S. equity indices will likely result in overall losses which are greater in percentage terms than their declines during the final months of 2018. These will probably be followed by strong rebounds into some part of 2020, not that different from what we experienced after Christmas 2018 but following a somewhat different timetable. Just as had been the case earlier in 2019, investors at some point during the first several months of 2020 will mostly conclude that we just had another correction but that U.S. stocks remain in a strong bull market. Once again the persistent pattern of lower highs and underperformance of the Russell 2000 and other baskets of small- and mid-cap U.S. shares won't be taken seriously. The U.S. dollar will keep dropping until around the middle of 2020. At that point we will suddenly experience a sharp rebound for the U.S. dollar, renewed losses for U.S. stocks and corporate bonds, and accelerated declines for U.S. real estate. Only at that point will we finally enter a deep recession.

The bottom line: inflation will precede recession. Especially now that everyone is obsessed with an allegedly slowing economy, it will likely become overheated sometime during 2020.

U.S. recessions are almost always preceded by powerful inflationary surges. This was just as true in 1937, 1948, 1973, 1980, 1990, 2001, and 2008 as it is today. With the Russell 2000 having dropped over 13% in nearly one year from its August 31, 2018 intraday peak (as of its August 6, 2019 close) and the S&P 500 outperforming, this is a typical severe bear market. As the vast majority of investors are expecting a higher U.S. dollar, lower interest rates, lower commodity prices, and lower inflation, we are likely to get the exact opposite just as we have experienced during past U.S. equity bear markets. It always seems different this time but it never is.

Disclosure of current holdings:

From my largest to my smallest position I currently am long GDXJ, 4-week U.S. Treasuries, the TIAA-CREF Traditional Annuity Fund, SIL, XES (many new), ELD, ASHR, FCG (some new), SEA (many new), SCIF (some new), OIH, ASHS, VNM, GDX, bank CDs, money-market funds, GXG, I-Bonds, URA, PAK (some new), SLX (many new), EPOL, EZA, EPHE, LIT, TUR, ARGT, FM, HDGE, ECH, EGPT, MTDR, EWG, EWU, EWI, REMX, EWW, FXF, COPX (many new), JOF, AFK, RSXJ, EWD, EWQ, EWK, GREK, FXB, EWM, CHK, EWN, GOEX, BGEIX, NGE, WOOD (all new), IDX, RGLD, WPM, SAND, and SILJ. I am short a moderate quantity of XLI.

Those who respect the past won't be afraid to repeat it.

I expect the S&P 500 to eventually lose more than two thirds of its value from its all-time top, whether that level has or hasn't already been reached, with its next bottoming pattern occurring with frequent sharp downward spikes perhaps during the final months of 2020 and into the first several months of 2021. During the 2007-2009 bear market, most investors by Labor Day of 2008 still didn't realize that we were in a crushing collapse, and I expect that during the first several months of 2020 most investors will similarly persist in believing that the U.S. equity bull market is alive and well. After reaching its all-time zenith on August 31, 2018, the Russell 2000 Index and most other small- and mid-cap U.S. equity funds have persistently underperformed their large-cap counterparts except before sharp rebounds; similar behavior had ushered in the major bear markets of 1929-1932, 1973-1974, and 2007-2009. The Nasdaq in 2018-2019 never quite achieved its March 10, 2000 intraday zenith in inflation-adjusted terms and has thus completed a historic long-term double top. A two-thirds loss from its recent zenith would put the S&P 500 near one thousand and I believe that its valuation will become even more depressed; eventual widespread fear over how much further prices will drop is likely to be accompanied by all-time record investor outflows from most U.S. equity index funds and U.S. high-yield corporate bond funds before we eventually and energetically begin the next bull market. Far too many conservative investors took their money out of safe time deposits in recent years; the incredibly long bull market has left them completely unprepared for a bear market. The behavior of the global financial markets since August 31, 2018 has been incredibly similar to the behavior in the early stages of nearly all major U.S. equity bear markets going back to the 1790s. In general, U.S. equity bear markets are far more alike than U.S. equity bull markets. Die-hard Bogleheads will probably resist selling until we are approaching the next historic bottom, but when they are perceived to be blockheads and become disillusioned by their method they will become some of the biggest net sellers of passive equity funds. Because so much money exists today in exchange-traded and open-end funds, as they decline in value their fund managers will be forced to destroy shares which will compel them to sell their components, thus depressing prices further and creating more share destruction in a dangerous domino effect. The Boglehead foolishness is especially ironic since Jack Bogle himself aggressively sold U.S. equities in 2000 and again in 2018 shortly before his passing.