February 2025
What happened in 2024?
Now that we are 12% thru 2025...
Per Kobeissi Letter, this is the first time since 1998 that S&P has posted back-to-back 20% performance years. Bitcoin and growth stocks led the way, while bonds, commodities and cash were the worst performers.
For the trend is your friend crowd, a couple of things to notice:
- Growth has outperformed value by 6% annually…which when considered cumulatively, equates to 720% vs 290% since 2011. Will value return to favor, or are there larger forces at work favoring growth?
- Overall, gold has performed ok from 2011 on. But it had a very strong year in 2024, and is at all time highs in early February 2025. Will the “barbarous relic” continue to perform?
- Bitcoin, since 2011, is the best performing asset for 3-year periods, then the worst asset of all in the 4th TBD if that cycle holds.
Yes, this chart was made by a competitor. I don't care. Charlie makes good charts. Nice guy from what I hear too.
Trump returns
Ready or not, Trump has returned to the White House. His rhetoric suggests an “America First” focus. Per Craig Shapiro (@ces921 on X) look for a more “mercantilist, multilateral [world] with a re-introduction of gold as neutral reserve settlement asset.” While we’re still far off from seeing dollar dominance go away (see the Dollar section below), there will be less incentive for foreign countries to rely solely on the dollar (and US treasuries) to store their wealth. This has already begun—over the last 10 years, China’s holdings of US treasuries have consistently declined from almost $1.3T to under $900B. While absolute foreign holdings of treasuries have increased, it has not increased as a total percentage of all US treasury debt.
Investor psychology
Bullish. Does that mean you should be bearish? That idea is what Howard Marks would call “first level contrarian thinking.” You’re being contrarian, but in a dumb way. You need to ask more questions: why are people bullish? Are the likely outcomes even better or worse than consensus?
Investors are emerging from a strong 2024 and expecting more of the same in 2025.
Bonds
- Suck (see chart 1). Longest bear market (52 months and counting) since 16 months in the early 80’s. Despite popular belief, bonds have risk (beyond default risk). Higher inflation remains a potential, CPI last checked in at 2.9% year over year, still above the arbitrary 2% that was targeted in the past.
- Bonds and stocks now have a positive correlation since September 2022. Thus bonds haven't offered significant diversification in the way that they used to. Investors may need to question the overall utility of bonds in a diversified portfolio. As a firm we have been aggressively sourcing and utilizing alternative asset classes to generate consistent and uncorrelated cash flows; the role fixed income has traditionally played.
Stocks
- Concentration at the top represents a potential problem. While the Mag 7 have been, well, magnificent, top-heavy markets generally portend volatility.
- There is general agreement that equity valuations are high. Whether or not 2025 will be the year that they revert to the mean remains TBD.
- Uncertainty surrounding the timing and implications of the recent AI boom make it difficult to determine whether valuations are stretched or whether we are on the precipice of a productivity-led earnings boom. More to come on this topic!
Gold
3rd best asset in 2024. The spot price is up over 100% since start of 2019. This is notable. Maybe gold is no longer a drag on the portfolio in the era of easy money? From the World Gold Council: “In the final quarter of 2024, when Trump won the US election, buying by central banks accelerated 54% year on year to 333 tons.” Signpost for a shift in the global monetary order? Certainly something we'll be keeping an eye on.
US Fiscal/Monetary Position
Summarized in a picture:
- $7.6T comes due in 2025, out of $36T
- $15T matures in 2024-2026
- Deficit spending of $1.8T in 2024, and $700B in the first quarter of the US government (Oct—Dec 2024)—will the new administration work to reduce the deficit? DOGE may help some, but at what point will those cuts negatively affect employment and GDP numbers, and how much pain can we really stomach?
- 10-year treasury (the 10-year is seen as a proxy for general economic well-being) has sold off over 100 bps since mid-Sept and approaching levels not seen since 2006. Most government bonds around the world are selling off as well (save a few countries like China, where yields are plummeting). (Ok, I wrote this in mid-January. Since then, the 10-year yield has simmered down to around 4.80% to around 4.50%).
Possible Reasons Why:
- Higher rates can be seen as indicating economic strength–sell bonds, buy risk assets if economy is strong. Paradoxically, higher rates may be a drag on stocks if investors decide the yield offered on the bonds is a better risk-adjusted return. On the other hand, rising yields mean bonds are selling off, which signals potential tightening of liquidity conditions
- Inflation expectations - possible reflection on expectations around Trump’s agenda
- Concern around fiscal/monetary outlook of the US - investors might demand more yield to hold bonds if perceived risk increases
- The US is being seen as much stronger relative to rest of the world, and money is flowing away from US bonds into equities and other investments
We’ll try to cover in our separate note our thoughts on the direction Trump/Bessent will take the US fiscal picture. Jerome Powell will likely stay at the helm of the Fed until April 2026. In a world where the US is running almost $2T deficits and we have debt to GDP north of 120%, the fiscal situation starts to matter more than the monetary one. Take a back seat Jerome.
Recession?
Channeling Howard Marks “When asked whether we’re heading toward a recession, my usual answer is that whenever we’re not in a recession, we’re headed toward one. The question is when.” (“I Beg to Differ”).
- Credit spreads (yield between corporate bonds and treasury bonds with similar duration) are tight! Not a lot of stress there.
- Consumer health—housing unaffordable, healthcare prices continue to rise? CC debt, mortgage market, savings (Kobeissi Letter)
- Unemployment rates crept up in 2024 from 3.5% to 4.1%. This increased triggered what wonks refer to as the Sahm Rule, which says that a 0.5% increase in unemployment suggests a recession may occur. The market largely ignored this. January payroll numbers looked strong.
- Yield curve steepening’s are usually followed by recessions. Historically. If you’re looking for reasons to be bearish, here you go:
We think that due to heavy T-Bill issuance under Janet Yellen, among other reasons, the yield curve may not be as strong as it once was a recession indicator.
The Dollar
Note: the DXY here is inverted, i.e., as it goes down here, it strengthens
- The DXY, an index that measures the value of the US dollar relative to a basket of foreign currencies (mainly the euro, yen and pound. Note that the Chinese Yuan is not taken into account and the dollar has notably strengthened there too) is up ~8% since late September. There are different ways to think about dollar strength. A simplistic way to look at it is that the dollar is strong because people want to hold it—the US is outperforming other countries. GO USA! Another way of thinking about it is in terms of liquidity (i.e. access to dollars). At least 60% of all world debt is denominated in dollars. If the dollar strengthens, it becomes harder to pay back this debt. An overly strong dollar is a pressure cooker for the rest of the world.
- Generally, a strong dollar is not great for risk assets (like stocks, real estate, private equity/venture capital, bitcoin). Note that that didn’t hold true around the election but has started to show correlation in recent weeks. This is a number we will continue to track. A weaker dollar (and lower treasury yields) is a priority for the Trump administration. Ironically, many of his policies (tariffs, cut of wasteful spending e.g.) may lead to a stronger dollar.