Past
Commentaries
4/20/2026
Current Commentary
Dear Friends,
I write this from sunny Marco Island where sitting in front of a laptop is more pleasant than any other place I know, bougainvillea and other flora in full color, palms dancing, mockingbirds singing. Lower Florida is in an extreme drought but I can’t help enjoying it. In all the ten years we’ve been coming here in March or April I can’t recall more than an hour of total rainfall.
Certain events are threatening financial stability and consequently our purchasing power. Growing and preserving purchasing power is our core investment philosophy. Conditions for the dollar, debt, inflation and corruption are chronic and getting worse. It’s not a time to do nothing, particularly for those retired or close to it.
I’m old enough to remember the Vietnam War, the Guns and Butter social programs of the 60’s, the oil shock of the 70’s, Nixon closing the gold window in ’71, the chronic inflation that followed – wiping out a generation of fixed-income retirees, a stock market that went nowhere for a decade, the deep recession of ’81 to ’82 that painfully reset the economy, the various banking and currency crises of the 80’s and 90’s, and the dotcom bubble bust of ’01 – ’02. Most vividly I still feel the conditions that led to the financial crisis of ’08 and its effects, from which we have never recovered.
The stock market has been remarkably resilient. The S&P 500 Index was down -4.6% in the first quarter. The aggregate of Brae Head portfolios was up 1%. And this week the Index has hit a record high 7,147. Corporate earnings have been outstanding, reducing the S&P 500 Index P/E to 28 last week. What’s the problem, right?
Schwab’s Chief Investment Strategist, Liz Ann Sonders made the point recently that the S&P Index maximum drawdown from the highs in ’25 was -9%, the NASDAQ Index max drawdown was -13%. However, the actual average drawdown of S&P stocks was -18% and -33% for the average NDQ stock. Indexes are engineered for optimism. The internals are not as sanguine.
The Dollar
A fundamental concern of mine has always been the U.S advantage as the world’s reserve currency. After WW2 the global forum in Bretton Woods, NH reset the rules for global finance. The dollar was chosen as the only suitable global currency. It was already predominant and ubiquitous, representing a democratic republic, backed by a stable government of laws. And it was backed by gold at $35/ounce. Free nations stockpiled gold. It had a fixed supply and a fixed value.
As the Guns and Butter spending of the 60’s accelerated, our trading partners around the world started wondering if the U.S. actually had enough gold to back all the currency it was printing.
President de Gaulle of France was the first to demand a return to the gold standard in 1965, calling the dollar standard an “exorbitant privilege” of the U.S. The eventual result was that President Nixon declared in 1971 that the dollar was no longer backed by gold. The dollar would instead be guaranteed by “the full faith and credit” of the United States Treasury. That was the end of Bretton Woods. Thenceforth currencies – and gold - would float with prices assigned by traders and central bankers and supply and demand.
By necessity this created futures markets in currencies and encouraged globalization and trade. Without the restraints of a finite gold supply, U.S. deficit spending accelerated, enabled by a Treasury that could print money as directed by the Federal Reserve Bank. So many dollars proliferated globally that new markets were born: Eurodollars and Petrodollars. Eurodollars were excess dollars abroad that could not be spent or invested in the U.S. Europeans and Asians used them to trade with other nations which also used dollars.
Petrodollars were created when Saudi Arabia, the world’s largest oil producer with the largest oil reserves on the planet, put an embargo on the U.S. in 1973 for its continuing support of Israel. Nixon sent Henry Kissinger to make a deal with the Saudis: the U.S. would sell weapons to Saudia Arabia in exchange for Saudi oil and further, all Saudi oil would be priced in U.S. dollars.
Bingo, petrodollars were born and Saudi Arabia – which needed currency to buy manufactured goods – would be flush with them.
There has been a concerted effort around the globe to delink from the dollar. The group of BRICS nations, Brazil, Russia, India, China and South Africa, was started in 2009. The bloc represents half the world’s population and over 40% of its GDP. They are buying oil by barter or their own currencies with their own unique treaties. Regardless of the alternative technologies aborning, oil is the largest globally traded commodity. The world still runs on oil and will for the foreseeable future. If oil is not traded in dollars the dollar will weaken. The dollar remains the world reserve currency and will for a long time. When it collapses it will be sudden and the world will look quite different. Global dollar reserves were 70% in 2001; they are 58% today.
The migration away from U.S. petrodollars has been interrupted and reversed with the removal of the Venezuelan dictator, the blockade of Iran, and the sanctions on Russia and anyone who buys oil from them. And the U.S. has become the third largest oil producer. Iranian and Venezuelan oil is priced in dollars again.
Petrodollars and Eurodollars can only be redeemed by spending on American goods and services or investing in the U.S. stock and bond markets. This supports our high market valuations.
Dollarization and just-in-time-inventories led to supply chain logistics and globalization. It hinted at a future world linked in peaceful trade and cooperation. Hurt one and you hurt all. But if only one nation can print its own currency without limit – free money – and another nation has a stated objective of manufacturing everything in the world – mercantilism - the inequities are obvious and unacceptable. They are national security concerns.
It’s estimated the dollar is overvalued by 20% to 40%. Oversupply cheapens anything and everything. Spreading dollars all over the globe keeps users hooked but contributes to its devaluation. On the other hand a cheaper dollar should increase U.S. exports – of whatever goods and services the U.S. has to export.
The Debt.
The Federal debt stands at $39 trillion but add all corporate and personal debt and the total is over $90 trillion. Add unfunded obligations – like Social Security and Medicaid – and the total is well over $100 trillion. Those obligations are promised, not guaranteed. Congressional baseline budgeting ensures that deficit spending, debt, can only expand and never decline.
What enforces the global Pax Americana and the reserve currency dollar is U.S. military strength. It is a big red flag when the interest on the federal debt is larger than the entire defense budget. The Iran and Venezuelan wars may have cost over $700 billion. The total defense budget is something over $900 billion. Something is going to give, hopefully later and not sooner.
It is another big red flag when the yield on AAA corporate debt is less than the yield on sovereign U.S. debt. Yet there it is. In modern portfolio theory the definition of the “risk-free asset” is the 3-month U.S. T-bill.
It is another big red flag that no one in authority will confront this monetary and fiscal insanity.
Any demand for cutting the Brobdingnagian government bureaucracy is met with coordinated outrage. Consider the violent, organized reactions to the Department Of Government Efficiency.
Inflation
The affordability issue has been seized as a political weapon – of course. But it is real, mostly the result of the conditions above. Most of the populace simply cannot stretch the funds they have to afford essentials and save something for the future. This has led to calls for more redistribution of wealth, for socialism and communism, which lead to serfdom and slavery. And all that would be redistributed is burdened by debt. He who loans you, owns you.
Inflation is not going away. It will continue and likely get worse. The definitions have been tweaked for political expediency. But the effects are all too real and inescapable. You may not see a pay cut or a price rise but the dollar will buy less and less as it devalues. As I’ve been saying for years, this is deliberate, bipartisan policy to repay the debt with cheaper dollars. This is baked in.
The Corruption.
You can read my commentaries leading up to and following the ’08 crisis. The cause of that was moral. It was stealing. It was lying. It was obvious to everyone involved that unqualified, junk mortgages were being packaged and sold – globally – to institutions and individuals. Institutional investors gambled with trillions. (The notional value of credit default swaps was $65 trillion at some point in ’08.) There were fabulous sums to be taken and no one would interfere. The best and brightest grads from America’s best universities were winking and nodding, insiders to the game. The players were absolutely giddy with greed.
Today I see the same giddiness. I see the same late stage “grab all you can while you can” because it can’t last. Today it appears at every level of government. Perhaps it’s always been this way somewhat. But it’s never been this bad or this serious, because the money is not from the abundant or excess productivity of a dynamic economy. All the money being stolen is all funded with additional debt. No government program is allowed to pass until every associated political interest is paid off. I wonder how big the percentage is? 20%? 30%? 80%? As Tony Soprano would say, “This is what I do, it’s my bread and butter.” Fault the Congress.
Unchecked, the system will collapse. The politicians don’t care. They’ve been paid already. It’s a moral failure. I don’t think it can be repaired because the powers that be won’t allow it. Everything gets investigated; nothing gets changed. The Sopranos were entertaining, this is not.
The Endgame.
To protect our purchasing power from inflation we are adjusting our portfolios. We want to own companies that have pricing power, that can pass along price increases to sustain profitability. We are increasing our allocation to utilities. They are regulated to be profitable. The regulators allow them to pass along their increased costs. They pay good dividends which tend to increase.
The things that increase with inflation are raw materials and commodities, energy, real estate (particularly farm land), consumer staples (foods, beverages, healthcare), and precious metals.
We expect continued growth in AI tech and biotech but our allocations will be biased (as always) to earnings and cash flows.
On the fixed income side we will stay in short-term bills or money markets for the foreseeable future. The Fed may lower rates if the market tumbles but the bond market is pushing rates higher. Whichever occurs, we don’t want to be committed to any position long-term. The 10-year Treasury yielded over 4.5% last week. The 10- year yield represents the market’s expectation for the average of 3-month yields over a 10-year period.
Finally, for those of you who’ve attended my Christmas luncheons you may recall that I’ve often closed with the suggestion that you buy an ounce of gold for yourself. Not gold funds. I don’t manage precious metals portfolios and it’s not part of my system. But in 1971 gold was $35/oz. In 1980 gold was $850/oz. an increase of 24x. An ounce today is ~ $5,000. At 24 x = $120,000. I hope you took my suggestion. It’s not too late.
Kind Regards,
Dennis M. O’Connor
