At the beginning of last week I came out and told readers that they ought to add to hedges. That’s not a market timing call, I have no idea if we are in a bubble, and if we are, when it will burst. But, when you’ve been doing this long enough you learn to recognize times when the risk outweighs the rewards. The market may rally 10% this week, that doesn’t change the fact that short term things seem a bit overbought and we are due for at least a pause.

Since you can’t time the market, the best way to protect yourself is in your portfolio construction. We are big fans of a revised version of an all time classic, the Permanent Portfolio.   I’m doing a webinar on Wednesday about it for advisors this Wednesday, and we had a pre call on Thursday. The moderator mentioned that many of the advisors on the webinar would be investors in an ETF that follows a risk parity approach (for compliance reasons and to not disparage other people in the industry I won’t name it). Risk parity is one of those ideas that should be studied in academia, but doesn’t really work in practice, for reasons I talk about below. I remember when the fund came out there was a lot of fanfare, but I assumed it had faded into obscurity at this point. I was wrong, it still has over $500M in it, even though the performance has been horrific. So today, we talk about why ideas like risk parity sound good in practice, but don’t work in the real world, and what we think is a better approach……

September 2022. Ray Dalio's All Weather fund — the most famous risk parity portfolio on earth, the institutional product that made Bridgewater the largest hedge fund in history — posted a 21% loss for the year.

Stocks were also down 20%. Long-duration Treasury bonds were down 29%. Inflation was running at 8%.

The hedge didn't hedge. The diversification didn't diversify. The product whose entire identity was built around performing in every economic environment delivered its worst year on record — in an environment it had, by its own framework, specifically prepared for.

 This is not a story about 2022. This is a story about what happens when an investment strategy built on a 40-year correlation structure is treated as permanent — and that correlation reverses.

The regime that made risk parity look like genius has changed. It may not be coming back. And almost nobody on Wall Street has updated their portfolio architecture to account for that possibility.

THE THREE FRAMEWORKS AT A GLANCE

PART I: THE BORROWED MIRACLE

Risk parity sounds like sophisticated science. In practice, it is a very specific bet disguised as diversification.

The traditional 60/40 portfolio puts 60% of your capital in stocks and 40% in bonds. Risk parity — as Ray Dalio articulated it in the 1990s and commercialized through Bridgewater's All Weather fund — says that's intellectually sloppy. Stocks are four to five times more volatile than bonds, so your "40% bonds" allocation contributes almost nothing to your actual risk profile. You are running a 95% equity risk portfolio with a bond garnish.

The solution: equalize the risk contribution of each asset class. Since bonds are less volatile, you need substantially more of them — and you achieve that through leverage. A risk parity fund running bonds at 2–3× leverage alongside equities creates a portfolio where each asset class contributes roughly equally to total portfolio volatility. The math is elegant. The architecture appears robust.

It works magnificently — under one condition.

"Bonds and stocks must be negatively correlated. From 1982 to 2020, they were. This was not a law of nature. It was a 40-year tailwind."

From 1982 to 2020, every time equities sold off, the Federal Reserve cut rates, bond prices rose, and the portfolio's leveraged bond leg cushioned the blow. This correlation felt like architecture. It was actually the product of a single macro regime: structurally declining interest rates from 15% to zero over four decades.

Then 2022 arrived. Inflation hit 8%. The Federal Reserve hiked rates from 0.25% to 4.5% in twelve months. Bond prices collapsed. Equities also collapsed. The correlation between the two assets went from negative to positive — meaning the leveraged bond position was no longer a hedge. It was an accelerant.

The deeper problem is the one most institutional portfolios have not addressed: the regime that created the negative bond/equity correlation may not simply be pausing. Persistent fiscal deficits, demographic pressure on entitlement spending, energy transition capex, and great-power competition defense spending are structural inflation drivers that were absent for the entirety of the period on which risk parity was calibrated. Risk parity did not fail because the math was wrong. It failed because the math depended on a correlation structure that investors treated as permanent — and in 2022, that correlation structure reversed.

The TIPS Problem: You Are Not Buying Inflation Protection. You Are Buying a Policy Index.

Risk parity portfolios that incorporate TIPS — Treasury Inflation-Protected Securities — as their inflation hedge are making a specific and underappreciated bet: that the U.S. Bureau of Labor Statistics index accurately tracks the inflation you actually experience. In many households, it doesn't. And even if it did, TIPS funds still failed their primary job in 2022 — the exact inflation shock they were invented to hedge.

Start with the measurement gap. CPI is not your personal cost-of-living index. It is a policy index. It tracks a constructed basket subject to methodological adjustments: substitution bias (substituting cheaper goods as prices rise, effectively redefining the basket); hedonic adjustment (reducing reported prices for goods whose quality has improved); and Owner's Equivalent Rent, which substitutes an imputed rental value for actual housing costs. None of these adjustments are sinister — they reflect genuine economic reasoning. But the gap between CPI and lived inflation — particularly in housing, healthcare, and education, the three largest line items in most household budgets — can be substantial in an acute inflationary episode. TIPS are linked to CPI. They are not linked to your actual cost of living.

But the measurement gap is almost secondary to the structural failure that 2022 exposed. It is essential to draw one distinction clearly: a TIPS bond held to maturity provides CPI-linked principal protection regardless of what rates do in the interim. That instrument works as designed. What failed in 2022 were long-duration TIPS funds used as tactical inflation hedges in risk parity portfolios. Those carry significant duration risk. When real interest rates rise — which is exactly what happened from 2021 to 2023, as the Fed hiked nominal rates faster than inflation expectations adjusted — long-duration TIPS prices fall, and they fall hard. In 2022, the iShares TIPS Bond ETF lost approximately 12% of its value in a year when official inflation ran at 7–8%.

There is also the phantom income problem that no risk parity sales deck mentions. For TIPS held outside a tax-advantaged account, the inflation adjustment to principal accrues as taxable ordinary income in the year it accrues — even though the investor cannot spend it until maturity. In a high-inflation year, the tax drag on taxable TIPS holdings can materially erode the inflation protection the instrument is nominally providing.

Risk parity's inflation hedge leg — whether expressed through TIPS funds, commodity futures indices, or inflation swaps — is built on the assumption that instruments indexed to backward-looking policy measurements will protect against forward-looking purchasing power erosion. They protect against yesterday's CPI at best. Long-duration TIPS funds introduce duration risk that can overwhelm that protection in rising-rate environments. The leg was never as robust as the backtest suggested. In the one acute test the framework was designed for, it failed.

You are not running a time-tested strategy when you run risk parity today. You are running a backtest calibrated on a correlation structure that reversed — with an inflation hedge that works as a hold-to-maturity bond but fails as a tactical ETF position when the Fed starts hiking.

PART II: THE PERMANENT PORTFOLIO — RIGHT MAP, WRONG CENTURY

Harry Browne introduced the Permanent Portfolio in 1981. His framework was elegant in its simplicity: the economy only ever does four things. It grows. It contracts. It inflates. It deflates. Build a portfolio that owns something that wins in each regime, and you are — by construction — always partially right.

25% stocks — the prosperity engine.

25% long bonds — the deflation and recession hedge.

25% gold — the inflation protector.

25% cash — deflation dry powder and crisis optionality.

The intellectual honesty in this framework is real. Browne understood that nobody reliably predicts which regime arrives next, and he designed around that uncertainty rather than pretending it away. The Permanent Portfolio has navigated multiple decades with respectable drawdown characteristics. In 2022, it lost roughly 12% — painful, but substantially better than risk parity's leveraged implosion.

But three of its four legs are structurally compromised for the world we inhabit today.

The Bond Leg: Duration Risk in a Structurally Higher Rate World

Long-duration Treasury bonds are carrying duration risk that the 1981 context never imposed at current levels. Browne designed this leg to capture Treasury price appreciation when rates fell. What happens when rates structurally plateau or rise? You own an asset that yields 4–5% while inflation runs at 3–4%, your purchasing power erodes in slow motion, and any rate spike delivers a capital loss that swamps the coupon income. The bond leg is not broken. It is running backward.

The Cash Leg: A Permanent Tax on Returns

Cash is the worst version of what it is supposed to be. In the ZIRP era from 2009 to 2021, 25% in cash earned approximately nothing for twelve years — a 25% allocation to a zero-return asset in a rising market. In the inflationary era, it earned less than inflation. Browne called it dry powder — available for rebalancing into collapsed assets. But dry powder that loses 2–3% per year in real terms is not optionality. It is an opportunity cost with a comforting narrative attached to it. And critically, the behavioral assumption embedded in the cash leg — that investors will actually deploy into crashed assets at exactly the right moment — is empirically false. Most don't. Most freeze. The cash sits there and earns nothing while the recovery runs.

The Gold Leg: Single Point of Failure for the Inflation Hedge

Gold captures the inflation regime correctly in principle but is a single-asset concentration bet in a world where the definition of inflation hedge has expanded substantially. Gold has no yield. It cannot be programmatically deployed. It requires physical custody infrastructure or counterparty exposure. And its 40-year track record of capturing monetary debasement in the Western financial system says nothing about its performance in a monetary system that is structurally transforming at the infrastructure layer.

The Permanent Portfolio intuited something Browne's successors have been afraid to say plainly: the instruments need replacing. The framework doesn't.

PART III: THE NEW DESIGN — EACH LEG DOES A JOB

The design principle is straightforward. Stop thinking in asset classes and start thinking in functions. Every position in a resilient portfolio exists to do a specific job in a specific regime. When a new instrument does that job more reliably than the traditional placeholder, you replace the placeholder. No sentimentality. No committee consensus required.

Leg One: Equities — Restructured Into Three Buckets

Stocks remain the prosperity engine. But 'buy equities' is not a framework — it is a permission slip. The equity leg of the new design is not a broad index allocation. It is three distinct sub-categories, each doing a specific job within the growth sleeve, stacked so that at least one is productive in any given phase of the market cycle.

Bucket One: Thematic Equities — Own the Wave, Not the Surfer

Thematic equities are structural macro bets expressed through the equity market. Not stock picks. Not sector ETFs. Focused positions in companies that are the direct, necessary beneficiaries of a secular force — one that is too large, too durable, and too well-capitalized to reverse on a normal business cycle.

The current thematics that earn a position in this framework: AI infrastructure buildout (the power, cooling, networking, and compute stack — not just the chip designers); defense technology modernization (autonomous systems, satellite communications, electronic warfare); and energy infrastructure (the grid rebuild, not the energy transition narrative, which has proven to be a decade early in its timing assumptions).

The discipline required here is the discipline most thematic investors lack: the wave is not the company. Themes are durable. The specific companies riding them often aren't. Position sizing reflects the theme's durability, not the company's current earnings momentum. And when the theme migrates — when the bottleneck in AI infrastructure moves from compute to power to networking — you migrate the position with it, not after it.

Bucket Two: HALO Equities — Own the companies that won’t be obsolete.

HALO stands for Heavy Asset Low Obsolescence. Basically the idea is you want companies that have assets and won’t be made obsolete by AI. Examples are Freeport-McMoRan, which is a copper company, and Union Pacific, which is a railroad.

These stocks tend to be less volatile than the thematic stocks, and when themes sell off money often rotates into these type of names.

 Bucket Three: Lindy Stocks — Own the Permanence

The Lindy Effect, formalized by Nassim Taleb and applied to investing by Porter Stansberry, states that the expected remaining lifespan of a non-perishable entity is proportional to its current age. A business that has survived and compounded for fifty years has a higher probability of surviving the next fifty than a business that has compounded for five. Not because momentum is a law, but because survival across multiple cycles — recessions, dislocations, regulatory changes, competitive threats — is itself the evidence of durable competitive advantage.

Lindy Stocks are the businesses that do not need to be explained in the context of a current theme. Their advantage is structural and has been tested. They generate free cash flow in good years and bad. They have survived management transitions, technology disruptions, and macroeconomic shocks that destroyed their competitors. In Stansberry's original formulation, these are the stocks you buy and hold through the noise, because the passage of time works in your favor rather than against you.

In the new design, the Lindy bucket is the portfolio's ballast along with HALO. Thematic equities will require rotation as waves crest and migrate. HALO equities require ongoing identification. Lindy Stocks require none of that. They require only the conviction that a business which has compounded value across five decades will continue to do so — and the patience to let compounding work at its own pace. This is the bucket that benefits most from doing nothing.

Leg Two: Beyond Bonds— Pre-Merger SPACs + P&C Insurers

These instruments replace the specific jobs bonds were supposed to perform: yield generation and disciplined duration management. They do not replace bonds' capital preservation function in a deflationary shock — and the design doesn't ask them to. Tail risk handles that job. Each instrument does one job, and this sleeve handles two: yield and short-duration ballast.

Pre-merger SPACs — special purpose acquisition companies that have not yet announced a deal target — are cash-plus optionality instruments, not bond replacements. Post-SPAC boom, they trade at or near trust value: the IPO proceeds sit in Treasury money market funds earning T-bill returns. Downside is structurally floored at redemption value. Upside is embedded the moment a target is announced and the market prices in a deal premium. This is not a duration hedge. It is T-bill collateral with a deal option riding alongside it — and when purchased near trust value, the option cost is approximately zero.

Property and casualty insurance companies perform the more sophisticated half of the yield job. Carriers like Markel, Fairfax Financial, and W.R. Berkley collect float — policyholder premiums held before claims are paid — and invest it predominantly in fixed income. In a hard insurance market, float income compounds faster than the underlying liabilities grow. These companies are professional duration managers. They beat the bond market because they are the bond market with an underwriting engine and pricing power layered on top. The combined ratio — claims plus expenses as a percentage of premiums — is the spread over the bond market's return. When that spread is positive, you own a yield portfolio that costs less than it earns.

Leg Three: The Monetary Hedge — Gold + Bitcoin + Digital Credit

Gold is not replaced in this design. It is joined. The thesis is not that Bitcoin has made gold obsolete — Bitcoin's institutional track record is 15 years, and it includes an 80% drawdown. The thesis is that gold is no longer the only instrument in the monetary hedge sleeve, and the sleeve is stronger for having more than one tool.

Gold brings what nothing else in the sleeve has: five thousand years of monetary legitimacy and a Lindy track record across every monetary regime in recorded history. In the acute liquidity crises that periodically hit all risk assets simultaneously — including Bitcoin — gold has repeatedly held or appreciated. It remains the foundational monetary hedge. The design keeps it.

Bitcoin adds fixed-supply digital scarcity enforced by mathematics rather than geology or central bank discretion. The total issuance cap is 21 million coins. No committee can change it. In every operational dimension — portability, divisibility, programmability, settlement speed — it improves on gold for the investor who can tolerate the volatility. The institutional wrapper problem has been substantially resolved: BlackRock's IBIT became the largest Bitcoin fund in the world less than five months after listing. The infrastructure exists. One honest caveat: recent academic work finds Bitcoin's correlation with the S&P 500 increased following ETF approval, which complicates the pure inflation hedge framing. Bitcoin is a fixed-supply monetary asset with equity-like risk characteristics during liquidity shocks. Size it accordingly — not as a bond substitute, but as the growth-optionality component of the monetary hedge sleeve.

Digital credit — tokenized real-world asset lending, on-chain fixed income instruments, yield-bearing digital assets in institutional-grade protocols — fills a different role in this sleeve: alternative yield. It is not an inflation hedge in the traditional sense. It is credit with a new delivery mechanism. It carries smart-contract risk, liquidity risk, collateral risk, and credit-cycle risk. The appropriate frame is not 'gold replacement' but 'yield innovation within the monetary architecture transition.' Size it as a credit position, not a monetary hedge.

Leg Four: The Crisis Engine — Cash + Tail Risk

The Permanent Portfolio's mistake was asking cash to perform two jobs simultaneously: liquidity reserve and crash convexity. Cash is excellent at the first job. It is structurally bad at the second. The new design splits these into two distinct instruments and assigns each one its proper function.

Cash stays. It is the liquidity reserve: operational dry powder, margin collateral, the buffer that keeps the portfolio from becoming a forced seller in a disorderly market. Keeping 5–10% in cash or short T-bills is not timidity. It is the functional prerequisite for every other sleeve to operate correctly. What cash cannot do is generate a meaningful return during a crisis — the moment when rebalancing into collapsed assets is most valuable. That is not a character flaw. Cash was never designed for it. The Permanent Portfolio assigned it that job anyway, and most investors froze when the moment came.

Tail risk strategies take the second job: crash convexity. Systematic long volatility positions, out-of-the-money put spreads, variance swap structures — these instruments cost a small annual premium in normal environments (1–3% of the allocation per year in drag) and multiply in acute, rapid-onset market dislocations. They do not merely preserve capital in a crash. They appreciate dramatically — and rebalancing rules force that appreciation into the collapsed assets at exactly the right moment, without requiring a human to make a correct decision under maximum fear.

The combined function: cash ensures the portfolio never becomes a distressed seller. Tail risk ensures the portfolio becomes an aggressive buyer at the precise moment conventional wisdom is at maximum pessimism. Together they replace the single cash allocation that was supposed to do both — and failed at one of the two jobs every time it was tested.

PART IV: THE FOUR SEASONS, REBUILT

Browne's four-seasons framework was correct. Here is how the new design performs in each regime:

PROSPERITY: Thematic equities compound with their structural wave; HALO equities capture adjacency revenue and the value premium; Lindy Stocks compound quietly in the background. P&C underwriting margins expand with pricing power and investment income grows with float. Bitcoin and digital credit appreciate with broader risk appetite. SPAC deal activity increases as equity markets are receptive to listings, adding optionality value to the trust positions. Tail risk bleeds its small annual premium — the cost of the insurance is the cost of the insurance.

INFLATION: P&C float income grows with rising rates as insurers reinvest short-duration portfolios at higher yields. Bitcoin and digital credit outperform gold in monetary debasement conditions. SPACs continue earning T-bill-plus returns. Equities weather moderate inflation. Tail risk bleeds. This is the regime risk parity was designed for and failed. The new design passes.

RECESSION / DEFLATION: SPAC trust values hold as an absolute floor regardless of equity market conditions — the Treasury money market fund does not correlate with equities. P&C carriers shift float into longer-duration instruments, capturing rate improvement. Equity leg draws down — this is the regime's cost, and it is accepted. Tail risk bleeds unless the recession is acute.

CRISIS / ACUTE SHOCK: Tail risk detonates and cash stays liquid — the two-instrument crisis engine fires on both cylinders. Rebalancing rules force tail risk proceeds into collapsed equity and credit positions. The portfolio emerges from the crisis with a lower cost basis across every growth asset. SPAC trust floors hold. Gold holds or appreciates. The crisis is the best rebalancing event the portfolio ever sees — and unlike the Permanent Portfolio's single cash allocation, no human judgment is required to execute it.

PART V: A FRAMEWORK FOR IMPLEMENTATION

The argument above is a philosophy. The table below is a starting point for translating it into a portfolio. The ranges are illustrative, not prescriptive — every investor's situation is different, and nothing here constitutes a recommendation. The point is not the specific percentages. The point is that every sleeve has exactly one job, and the jobs do not overlap.

The exact allocation is investor-specific. Risk tolerance, time horizon, tax situation, and existing holdings all influence the right sizing within each range. What is not investor-specific is the logic: every sleeve does one job, and no sleeve is asked to do a job it was not designed for. That is the entire point.

 CREDIBILITY FIREWALL

FIVE THINGS TO DO WITH THIS INFORMATION

1.  Audit the bond leg of your portfolio first. Ask what job each fixed income position is actually doing. Duration? Yield? Crisis protection? Each function has a better instrument than a generic bond fund in today's rate environment.

2.  Build a small tail risk position before you need it. The math of the Universa case is not recoverable if you buy after the crash begins. The position needs to exist before the event. Size it at 2–5% of the portfolio. Accept the premium bleed as the cost of the option, or learn how to adopt tail risk without the bleed.

3.  Screen P&C insurer combined ratios quarterly. Markel, Fairfax, and WR Berkley are the canonical names. When combined ratios compress below 90, the underwriting engine is generating alpha on top of the float income — that is the maximum value state for the bond replacement thesis.

4.  Do not own Bitcoin as speculation. Own it as a fixed-supply monetary asset in the same sizing framework you would apply to a gold allocation — typically 5–10% of the inflation hedge sleeve. The volatility is the cost of the supply certainty. Size accordingly.

5.  Stress-test your existing framework against a 2022 scenario and a 2020 scenario simultaneously. A resilient design should survive both — the inflationary bond/equity positive-correlation environment and the acute deflationary shock. If your portfolio fails one of those two tests, you have identified the exposure that needs replacing.

Many of today’s data centers are still using copper wiring. The same metal we’ve been using for a hundred years.

At the speeds AI demands with data moving between thousands of GPUs, billions of times a second, copper doesn’t just slow down.

It turns that data into heat. The more you push through it, the worse it gets. There’s no software for fix for that.

So what’s the answer?

Explore the Photonics Layer…..

Frances does this way better than I do………

News. Watch gold and bitcoin this week. Both have been awful (see above for why I think you should own them), both also had undercut and rally moves on Thursday.

Rough couple of weeks for memory stocks. MU earnings turned things around for a day, but wasn’t sustainable. Maybe this will help……

This is the next big AI theme. Not a lot of pure play ways to express a view just yet though…..

I was wrong about oil prices not going back into the 60’s…

That, along with a weak jobs number, could flip the Fed from hawkish to dovish. Watch rates, bond guys still not thinking about this….

But, if it flips it could be a massive tailwind for equities.

From Mike O’Rourke over the weekend…..

Noise. Burry is bearish, again.

He hasn’t gotten a lot right since 2008, so not sure why this deserves an article. Even if he had, nobody can accurately time the market. Could this end up being a great bet? Am I going to move my portfolio around based on what Burry is thinking? Nope.

Dumb Advice. Buy the Russell 2000

This doesn’t change the fact that the Russell 2000 is a crappy index.

When capital chases a tech theme, it tends to pile into the most obvious
layer and miss the one underneath. AI spending is now bumping hard
against memory. Hyperscalers — the big cloud builders like Amazon,
Google, and Microsoft — have shifted memory from 8% of their build
budgets to an estimated 30% in a single cycle. That capital has to go
somewhere. If the constraint is memory, and the build can't move without
it, shouldn't an investor own the layer AI runs on?

View HBMX fund holdings →

Distributor: Foreside Fund Services | Investing involves risk including
possible loss of principal.

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$GLD ( ▲ 2.26% )

The time to buy gold is when nobody wants it. $GLD ( ▲ 2.26% ) had an undercut and rally move on Thursday, could be the beginning of a larger move here.

Great conversation on wide ranging topics with Kenny Polcari…

The H.E.A.T. (Hedge, Edge, Asymmetry and Theme) Formula is designed to empower investors to spot opportunities, think independently, make smarter (often contrarian) moves, and build real wealth.

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