Jerry Parker & Salem Abraham - Lessons From A Lifetime of Trading | #452

Episode Summary

Executive Summary: Jerry Parker and Salem Abraham argue that 2022 validates trend following and non-correlated alternatives amid the worst bond-stock drawdown in decades. They discuss inflation, rising rates, CTA performance, portfolio construction, the value of rules and stops, and why investors still underestimate trend’s role as both hedge and return driver.

Main Topics: 2022 market regime: inflation and rising rates (Priority: 5/5): Both guests frame 2022 as a rare regime dominated by rapid rate hikes and persistent inflation, hurting stocks, bonds, real estate, and traditional 60/40 portfolios. Trend following as portfolio protection (Priority: 5/5): They make the case that trend following shines in unusual environments, especially when both stocks and bonds fall, because it can short major losers and capture major winners. Why investors ignore CTAs (Priority: 4/5): The guests argue allocators often don’t understand trend following, dislike its counterintuitive logic, and are anchored to equity-centric benchmarks and traditional portfolio thinking. Rules, exits, and emotional discipline (Priority: 5/5): A major theme is the importance of mechanical rules, trailing stops, small losses, and letting winners run—contrasted with discretionary trading and lack of sell discipline. Broader diversification through single stocks and alternatives (Priority: 4/5): Jerry and Salem discuss expanding beyond futures indices into single stocks, bonds, currencies, commodities, and external hedge-fund sleeves to improve diversification. Energy, commodities, and inflation beneficiaries (Priority: 3/5): Salem especially highlights oil, gas, coal, and energy-linked assets as interesting in a high-inflation, supply-constrained world, while noting ESG and infrastructure constraints. Portfolio construction and benchmark limitations (Priority: 4/5): They criticize simplistic 60/40, 70/30, and long-short equity thinking, arguing that true diversification requires low-correlation exposures and better benchmarks for alternatives.

Key Arguments: Trend following is valuable because it can profit in markets people have never seen before and can hedge both equity and bond drawdowns. The 2022 environment is unusual because the dominant force is rising interest rates, which pressure asset valuations across nearly everything. Inflation can eventually benefit stocks via higher nominal prices and earnings, even if markets initially react negatively to rate hikes. A small allocation to trend can materially improve a traditional portfolio, but both guests believe the optimal allocation is likely much larger than what most institutions use. Investors and allocators often reject trend following because they do not understand its logic; they want an explanation, not just evidence. Rules-based exits and entries are essential; missing the big trade or refusing to re-enter after a loss is often more damaging than taking small losses. Single-stock trading can improve diversification versus index-only CTA approaches, and trend logic applies to individual names as well as futures. Alternatives helped Salem’s mutual fund offset stock and bond weakness, showing the practical value of non-correlated sleeves in a stormy market. Energy may be attractive because supply is constrained, drilling economics have changed, and oil at current levels may not be as expensive in real terms as it appears. Discretionary investors frequently lack written sell criteria, which can leave them stranded after major drawdowns or after exiting too early and never re-entering.

Data Points: 60/40 performance: One of the top three worst years ever on a nominal basis; worst ever on a real basis in the last 100 years (with 1917 possibly worse). - Meb’s opening remarks describing 2022 as a historically bad year for balanced portfolios. Inflation in Argentina: 40% to 50% annual inflation - Salem used Argentina as an example of sustained currency depreciation and inflation. Cropland loss due to urbanization: Approximately 4.8 acres per minute - AcreTrader ad copy highlighting farmland scarcity over 1997-2022. Farmland investment minimum: $15,000 - AcreTrader offers passive farmland access with this minimum. ETF year-to-date performance breadth: 90% to 95% of ETFs down - Meb referenced a poll and broad market losses in 2022. Trend allocation in Salem’s mutual fund: 35% notional exposure - Salem described the alternatives sleeve in his fund. Stock allocation in Salem’s mutual fund: 50% stocks - Current portfolio mix described during the discussion. Interest-rate exposure in Salem’s mutual fund: 15% interest rates - Current portfolio mix described during the discussion. Salem’s fund year-to-date result: Down about 5.5% - He said alternatives helped offset losses in stocks and bonds. Jerry’s CTA horizon: Almost four decades / 39 years - Jerry described his long trend-following career beginning with the Turtle experiments. Diversified allocation study: 36% long-only stocks / 64% SOCGEN trend index - Jerry cited a back-of-the-envelope allocation comparison over 22 years. Great Depression stock drawdown: About 80% - Jerry used this to illustrate the danger of high equity allocations. Stock/bond drawdown threshold: Over 50% - Meb warned that 60/40-style portfolios can suffer severe real drawdowns in crises. Oil drilling activity: Up around 70% in the last 10 months - Salem discussed energy supply dynamics and drilling economics. Rigs operating worldwide: Less than in December 2019 - Salem noted that higher prices have not translated into more rigs. Loss on a major trade: 7% in one day - Jerry recalled losing 7% on a 1990s UK political trade after John Major won. Trend-following risk example: 50 basis points or 20 basis points - Jerry described how small the downside can be on individual trend trades. Historical stock market outperformance gap: Zero outperformance for 68 years - Meb used this to point out how long equities can lag bonds even if they win over the long run. Bonds vs inflation gap: Mile-wide gap - Meb argued bond yields were far below inflation at the time of recording. Potential inflation range referenced: 8% to 10%+ - Discussion of CPI and the possibility of sticky inflation. Potential oil price scenario: $150 to $200 - Salem’s personal view on how high oil and gas could potentially go.

Pivotal Quotes: "If you sell tornado shelters, you kind of like to have a tornado every now and then." — Salem Abraham: He explained why volatile markets are good for alternatives and trend-following strategies. "Trend following is like a spare tire in your car. You don't know when you're going to need it, but you want to have it there." — Salem Abraham: Used to describe why investors should keep trend exposure even if it feels unnecessary in calm markets. "I think what's happened recently over the past 10 years, stocks have been the best. That's the one sector that's been the best, and people felt like that's the go-to." — Jerry Parker: Jerry argued that investors over-allocate to equities because of recent experience, not long-term robustness.

Implications: Listeners should treat trend following and other non-correlated strategies as structural portfolio tools, not tactical add-ons. In a world of inflation and rising rates, rules-based diversification may matter more than ever.