Dynamic Alpha Macro Fund (DYMIX) – January 2025 Overview

This Month’s Performance

As we mentioned last month, Morningstar® ranked the Dynamic Alpha Macro Fund as the #1 position in the Macro Trading category for 2024 (60 funds)! Leading the category for 2024 indicates that our process and methodology are working and that DYMIX can be a valuable tool for most investors and financial advisors. 

For the month of January, we continued to provide equity-like returns, doing so with several different return drivers in addition to equities. The global macro strategy underperformed, leading the overall fund to underperform the S&P 500 Index (1.46% vs 2.78%).  Over the last 12 months, the fund gained 22.55% versus the S&P 500 at 26.38% and the S&P Target Risk Growth Index at 12.80%. 

The S&P Target Risk Growth Index targets a 60:40 stock-bond mix.  The fund’s outperformance relative to that index shows that an allocation to DYMIX can be additive to an overall diversified portfolio, which we believe will help drive dynamic alpha generation.

Our approach aims to provide equity-like returns utilizing non-correlated assets. Providing differing returns in the same time frame is a testament to the strategy’s diversifying effects on an investment portfolio over time.

As you read the monthly commentary, our Global Macro Manager provides his thoughts on the market’s obvious obsessions (I’m sure you can guess) and what the market could be missing. There are also details on most of our portfolio positions, with fundamental insights on why we think they make sense at this time. Enjoy!  

Focusing on the Wrong Narrative

Prices in markets are determined by millions of individual participants, each with their own time horizon and belief system. Because it’s impossible for any one person to understand all the data points that come together to inform price action, each of us simplifies things by finding a narrative to condense information and make decision making possible. Without these narratives, any sort of discretionary decision making would fall prey to paralysis.

It doesn’t take much to determine the current narrative driving markets. If you read the Wall Street Journal or any sort of investment banking research, skimming headlines leads you to the current thoughts impacting the market.

Today, two narratives dominate the financial headlines: AI (artificial intelligence) and inflation. Will AI, and the new reveal of DeepSeek’s R1 model lead to the realization that Microsoft, Meta, and other large tech companies have lit hundreds of billions of dollars on fire, ushering in a CapEx bust, akin to the telecom bust of the dot-com era? Will President Trump’s tariffs force the Fed to do the unthinkable and raise interest rates this year to fight the inflation that Economics 101 tells us will arise from the tariffs? We have our own answers to these questions, but more importantly, we don’t think they are the correct questions or narratives to be focusing on right now.

It’s always where you’re not looking that trouble comes from, or alternatively, where you were looking but have given up looking because nothing happened. This is the proverbial “left field” analogy from a U.S. baseball perspective. We’re not sure why left field receives notoriety compared to right field, but regardless, what is potentially in left field today?

Our view is that left-field contains something obvious that everyone looked at 1-2 years ago but no longer cares about because the hot narrative has moved on. It’s the labor market.

The chart above shows that across multiple measures, labor demand is weakening the way that it normally does at the cusp of a recession.

The jobs-workers gap (labor demand minus labor supply), small business job openings, and consumers’ own reported ability to find jobs all point toward a labor market that is continuing to deteriorate. Because this deterioration has occurred slowly over the last two years, Wall Street has deemed it too uninspiring to continue to spill ink on and moved on to AI, tariffs, and inflation.

The white-collar job market appears recessionary today. Searching for work in consulting, banking, legal services, or otherwise resembles the job market in 1991, 2002, or 2009 (recessionary times).

Blue-collar roles seem resilient but are increasingly on the verge of declining as well. While construction payrolls appear healthy, home starts have rolled over hard and construction jobs should follow soon. Uber and delivery driving (gig economy) may help some but cannot replace the stability and higher income stream of a full-time job.

Labor market indicators are flashing red across the board, and no one really cares.

Back in 2005, housing stocks rolled over into a bear market. As housing has historically been a leading canary for the economy, for a moment headlines worried about a downturn. When nothing happened, the narrative shifted to rising commodity (particularly oil) prices. By early 2008, the Federal Reserve was more worried about inflation as a risk to the economy than anything else – a few months later the largest deflationary shock in 80 years would be ushered in with the GFC.

What’s happening today feels like the 2005-2007 period, when the narrative shifted as market participants got bored when nothing happened to the housing market after housing equities rolled over. We believe that the fate of the U.S. labor market will be the key economic development of 2025 – and not artificial intelligence or any sort of potential inflation from tariffs.

Portfolio positioning

We have starter-sized positions across our portfolio today and will look to add carefully to these themes as they prove themselves in the months ahead, maintaining a focus on balanced portfolio management.

2-year Treasury notes (long)

We have been long 2-year Treasuries since May 2024. We reduced the position in Q4 as it traded against us and look to increase it once again in the months ahead. A recession could lead the Fed to cut rates to 1.5-2%. Since most investors are focused on the risk of inflation, we believe the risk/reward of this position is excellent.

Cocoa (short)

After being bullish on cocoa for part of 2023, we have shifted to a bearish posture, initiating a short position. Shortages of cocoa beans from West Africa are widely understood. However, supply also comes from Brazil and other parts of South America, and new supply will likely hit the market over the coming 12 months. From a technical standpoint, the market has made a couple of major “spike” tops over the past year – this sort of behavior is indicative of a market top.

Corn (long)

After a two-year bear market from 2022-2024, where prices dropped by nearly 50%, a crop report three weeks ago offered evidence that yields in the U.S. are not as strong as was believed. The supply/demand balance is finally shifting. Poor weather and sub-soil conditions in Brazil decrease the likelihood of a bumper crop. Couple that with Chinese demand for Western hemisphere corn, and prices could very well head back toward where they were in 2022.

Gold (long)

We believe a secular (multi-year) bull market in gold has started and has a long way to go. Central banks all over the world are buying gold, spooked by the U.S. decision to freeze Russia’s reserves in 2022. Debt that has built up over 50 years – and which really didn’t matter for that entire period despite the compelling calls of fiscal responsibility – is finally about to really matter, as interest rates could rise and create financing issues. Gold could float higher in price for years to come, acting as a balance against the amount of base money that needs to be created.

Silver (long)

While correlated with gold, we think silver will diverge from gold as its role as an industrial metal continues to gain importance. Silver paste is a critical component in solar panel manufacturing. The little that the West is doing with solar energy is dwarfed by China, which is producing an order of magnitude more solar panels to diversify its economy from its oil reliance. The silver price has done little for years; that is likely to change soon.

British pound (long)

We are short the U.S. dollar, via a basket of long pound and long yen. The two are not as correlated as you might believe, as the yen tends to move differently than other developed market currencies. The long British pound position is our preferred expression of our belief that the U.S. dollar is about to enter a multi-year bear market against foreign currencies. Bearishness on the U.K. economy has hit extreme levels; any slight improvement at the margin should support the pound, which is undervalued. The pound has traded in a range over the past 8 years, with a central tendency around today’s level of 1.25 dollars per pound. This could easily move higher to a pre-Brexit level of 1.6 over the next couple of years.

Japanese yen (long)

If the Brazilian real or Indian rupee were to trade at a 40-50% discount to the U.S. dollar on a PPP (purchasing power parity) basis, we wouldn’t think much of it. It’s an entirely different issue when the world’s third-largest economy is in that spot. The interest rate differentials that pummeled the yen over the past few years are reversing, as the Bank of Japan is the only central bank raising interest rates. Flows should reverse this year, catalyzing a 20-25% move higher in the yen.