Past
Commentaries
08/25/2025
Current Commentary
Dear Friends,
September historically is the worst performing month of the year. October is the most volatile month of the year but finishes in the black more often than not.
Where do opportunities lie? Should we increase our fixed income exposure and buy bonds? The yield curve is almost back to normal, with the exception of short-term Treasuries: 3-month 4.2%; 12-month 3.9%; 2-year 3.7%; 10-year 4.3%; 30-year 4.9%.
Current yield on money market funds is 4.13%. I would not be surprised if Fed does not lower rates in September. The consensus is for a .25% cut. In fact, I would prefer the status quo. It would indicate that the Fed is committed to an anti-inflationary posture. Inflation remains a problem, running well above the 2% target rate. Our systematic fixed income strategy is to extend maturities (duration) as rates rise for yield, and shorten as rates fall for capital gains, incrementally. Rates are presently highest at the shortest duration (3-month T-bill, money market rate) - which is 95% of our aggregate fixed income exposure now.
My conviction is that longer rates will stay high because of the debt, and that short rates will stay high because of inflation. U.S. rates are double the rates of the EU and Japan.
International stocks are outperforming domestic markets so far this year. Longer term they have significantly underperformed the U.S.
Should we invest more internationally? Our system is to achieve international exposure primarily by owning American multinationals. Foreign accounting standards are less stringent – and hence less reliable – than American standards. And 41% of S&P 500 revenues are already derived abroad. We own a handful of high-quality foreign companies, e.g. ASML, SAP, Shell, Novartis, Taiwan Semiconductor, Siemens, Eaton.
Presently, lower valuations and higher dividends abroad are outweighed by political and currency risks. In my opinion, you can’t soberly invest in China. India is untouchable, bad karma, an investment “outcaste.” Emerging markets? I don’t know and don’t want to. Better to know well what I can. And the BRICS (Brazil, Russia, India, China, South Africa)? Good luck.
And then there’s Europe. To be glib: Europe needs paint. German Chancellor Merz stated Saturday what has been obvious for years: “The welfare state that we have today can no longer be financed with what we produce in the economy.” Pay attention, America, your debt is showing.
Better and safer to invest in big, broad, liquid, capital-driven, upwardly-mobile, idea-fertile American businesses. While the economy is still lackluster, corporate earnings have been robust. S&P 500 earnings are up over 8% for the trailing 12 months. Probability of a near-term recession has diminished. A positive yield curve is constructive.
GDP growth is struggling to realize 2% this year. The labor markets are softening, though the biggest decline in hires is in government and social work - which were the biggest increases over the last four years. New home sales slowed in July, 8% lower than a year ago. Raw material costs have risen above their long-term average, mostly due to tariffs. Consumer spending remains sanguine but consumer debt is not. The credit card delinquency rate is over 12%. The long-term average is 9%. The economy is not in stagflation but it’s not surging either.
I expect that the impact of the tax bill, particularly accelerated depreciation and immediate expensing of capital investments, is significantly more conducive to growth than a quarter point reduction of the Fed Funds rate, if not as immediate.
Cryptocurrency
I just finished reading economist Kenneth Rogoff’s book Our Dollar, Your Problem which addresses the dollar as the world’s reserve currency and America’s abuse of the circumstance by printing away its debts. He addresses the conditions that are compelling alternative currencies for trading, including barter, the devaluation of the dollar, effects on inflation and interest rates, cryptocurrencies and the future of money.
He makes the point, eloquently, that money is not whatever people agree to accept in trade; that wherever there is a government it is the government that decides what is acceptable for use in trading and payment of debts – including taxes that the government collects. Either by declaration or coercion (regulation) a government can render a currency either effective or useless. Despite their lack of sovereignty, cryptocurrencies have a growing crowd of fanatical proponents. But they are not “worthless” as described by Nouriel Rubini and Warren Buffett or “a hyped-up fraud” as described by Jamie Dimon, or a bubble or a hustle.
The killer app for cryptocurrency is the sprawling, global, underground economy, “easily 20% of global GDP.” He cites a 2021 World Bank study indicating the average size of the underground economy to be 17% of the gross national income of developed economies and 32% of developing economies. He estimates over a trillion dollars of paper currency is overseas and that supplying currency for the underground economy has been a huge business for the United States. It is this business that crypto exploits. The predominant cryptocurrency is bitcoin. Even without a sovereign pedigree the value of bitcoin is clearly not zero.
Increasingly, bitcoin transactions are conducted on exchanges which function as banks do for paper currency. Because transactions occur on a blockchain they are eventually traceable. Consider a purchase of bitcoins with Argentinian pesos and then a sale to convert the bitcoins to U.S. dollars. It is through exchanges that Rogoff predicts full regulation of crypto coins within 10 years or so.
Rogoff concludes that, if the rapidly rising U.S. debt is left unchecked, the world is in for a sustained period of financial volatility marked by higher real interest rates and inflation and more frequent financial crises. He emphasizes that high inflation is not a solved problem and its roots are in the political economy. “Pax Dollar assumptions built into today’s markets…may well be upended over the next decade, if not much sooner.”
The great MIT economist Rudy Dornbusch said, “In economics, things take longer to happen than you think they will and then they happen faster than you thought they could.”
Government spending has to be drastically reduced. It is inarguable.
On A Lighter Note
The Babylon Bee reports that “Elon Musk Leaves Job Of Making Government More Efficient For Much Easier Job Of Sending People To Mars.”
Kind Regards,
Dennis M. O’Connor
