For the past few weeks, I've been tossing around the idea of creating a Dollar Threat Index.  Why?  My thinking was that when the threat to the dollar (and thus the existing power structure that supports it) is high, we are likely to see that status quo power structure step in to protect itself.   What would this look like?  Increased pro activity in regulation.   Indeed, after this latest crypto bull market, central banks and regulators around the world are now going on the offense. 

So I built it, the beta version of what I call the Dollar Threat Index.    The results below are pretty interesting. 

To do this, I identified a handful of assets that have historically served as alternative stores of value (I left sea shells and livestock out... ) and applied a commonly used dynamic portfolio construction method so that one doesn't dominate the other.  Based on the historical data, I then identified what seemed to me to be obvious regimes (periods with similar characteristics) and colored them red and yellow below.  Red regimes are periods where the index is rising (the threat to the USD is also rising) and yellow are periods where the threat is more moderated. 

What I wasn't expecting were the results I got when I looked at the price of BTC at the beginning and end of each regime.   I've pasted those below as well.  You can see what the returns would have been if one had simply bought at the beginning of the red regimes and sold at the end of them.  During the yellow, you're sitting on the beach letting others fret about the downside risk.

Of note, the index is 100% out of sample, meaning I didn't build it then fine tune to get the results I wanted.  What you see is the original effort on the index.   One could and should argue about where to begin and end a regime but I tried to be as fair as I could be about it.  On the next version, I may put an exponential moving average on it to take away any debate.  With that being said, I didn't build this to be a trading model but rather to provide more of a fundamental view into regimes around dollar confidence.  Just another step in my Skeptic to Hodlr to Investor journey.  

As with all backward looking analysis though, please take this with a grain of salt as past returns are never indicative of future results. 

Seeing how effective this index has been,  I plan to update regularly for my own purposes.  If you would like me to publish those updates, please like, follow, and tip!   As always, this is not meant to be investment advice so please do your own research. 

Cheers,

NZFX

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